"All truth goes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident." - Arthur Schopenhauer
The first quarter has now come and gone, and what a start to the year it's been for global markets and our ATAC strategies. As followers of our analysis are aware, we turned aggressively bullish following the first week of January as our Accelerated Time And Capital models sensed a dramatic shift to "risk-on" and the return of inflation expectations. Intermarket trends so drastically altered that I have stressed in my writings since the start of the year that price is suggesting there is a high probability of 2012 playing out like 2003 and 2009, which could result in a significant move higher for equities. Despite continued skepticism, the analysis has turned out to be correct so far. Many equity indices have had their best first quarter in years, with even equity markets like Japan's having their best 1st quarter in nearly a quarter of a decade.
We do not believe it's over by a long shot. Ed Dempsey and I have continued to do numerous interviews explaining that it is entirely possible for stocks to have a significant move higher from these already elevated levels. I encourage you to listen to my Bloomberg Radio interview for the show "On the Economy" at http://media.bloomberg.com/bb/avfile/Economics/On_Economy/v2Xe3vznC_Sk.mp3, as well as view Ed Dempsey's latest market update and some of my live Bloomberg segments on our YouTube channel at www.youtube.com/pensionpartners. Following the Summer Crash, Fall Melt-Up, and Winter Resolution calls, the Spring Switch, which is the idea of the switch in mentality and action away from risk-free and into risk, I believe is very close to happening for a lot of scared money that will soon be scared that it is wrong about the future.
What is being missed by the vast majority of market observers is speed and magnitude. Worldwide equities have risen by around $5 trillion in just three months. $5 trillion. That is more than the European Central Bank's balance sheet. That is more than the Federal Reserve's balance Sheet. That is 8x more wealth than what the Fed's $600 billion Quantitative Easing 2 program injected into the economy over a 7 month period. That is roughly 1/3rd of the U.S.'s debt. My point is that markets can create and destroy wealth faster than monetary and fiscal authorities. Given the size of stock markets worldwide, a rising equity environment rather than anticipating future economic growth can create it.
Our ATAC models remains in risk-on mode, and we are sensing that another pulse higher may come in the weeks ahead driven by China and emerging markets. While U.S. markets performed well last month, the relative weakness in BRICs (Brazil, Russia, India, and China) suggests a mini-correction may be underway overseas. As that nears its end and investors believe more and more in the reflation story, money likely can flow aggressively back into emerging economies and push risk-sentiment and risk-taking to higher levels.
For the skeptics, do understand that our bullishness is a reflection of market conditions, which time and time again I have said are more important to identify than anything else on a macro level. The conditions are signaling a period of reflation similar to 2003 and 2009, which increases the odds of a significant move in risk assets beyond what most would normally think. Numerous psychology studies have shown that people tend to overestimate the odds of something happening when its explained to them. The global narrative has been so negative because of Europe that we are all likely overestimating further declines, which in turn makes the payout for betting on further advances higher. The fact that put option prices are at near five year highs, and hedging persists at an aggressive pace in VIX futures, means that few are comfortable in stocks. If you look at the history of great bull runs, it is that skepticism that becomes the foundation for a big move higher.
Remember - all truth goes through three stages.
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Summary of Writings Published Last Week:
The Lead-Lag Report: Is the Second Wave Up Coming? - http://www.minyanville.com/business-news/markets/articles/stock-market-market-technicals-technical-analysis/3/27/2012/id/40098v
Emerging Markets Play into Spring Switch - http://www.marketwatch.com/story/emerging-markets-play-into-spring-switch-2012-03-26
Will Financials Lead the Way Higher? - http://www.marketwatch.com/story/will-financials-lead-the-way-higher-2012-03-28
Revisiting Japan and the Spring Switch - seekingalpha.com/article/461961-revistin...
Gold Miners Again Set to Lead and the Spring Switch - seekingalpha.com/article/465731-gold-min...
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.