"My attitude is that if you push me towards something that you think is weakness, then I will turn that perceived weakness into a strength." - Michael Jordan
Equity averages rose nicely last week as stocks rebounded from the "mini-correction" I have been addressing in my writings since the beginning of April. Meanwhile, bond yields remain depressed as stocks continue to ignore the message of panic low interest rate levels. Economic data showed some slight improvements, particular on the housing front, and successful bond auctions from Spain and Italy brought bulls back into risk assets. The reflation theme I have been stressing remains very much in play, however the "Spring Switch" following the Summer Crash, Fall Melt-Up, and Winter Resolution has not happened just yet.
The idea behind the Spring Switch is my belief that a "Great Re-Allocation" out of risk-free and into risk is about to occur by the retail investor as stocks continue to push for new all-time highs. Fund flow data still shows money flooding into bonds funds as equities continue to be disbelieved. I talked about this last Friday on Bloomberg's Taking Stock with Pimm Fox in a segment which can be seen on our YouTube channel at www.youtube.com/pensionpartners.
And yet here we are recovering strongly in risk assets. Just weeks ago I received comments from readers of my various articles on MarketWatch and Minyanville that completely dismissed the idea that stocks would be resilient, a decline would be shallow, and that this was the test for the Spring Switch idea to begin with. Bullish investor sentiment so dramatically fell off a cliff that the crowd simply could not be right about the prospects of a deep correction. Earnings have continued to come out much stronger than expected (Apple and Amazon being the most notable), and Europe may suddenly become a source of strength for markets. I have noted earlier this year in numerous interviews that as elections take place, the rhetoric will change from austerity to growth initiatives. Words alone can cause risk-taking and markets seem to like the idea of shifting towards increasing revenue through economic activity, rather than a complete push towards spending cuts.
Market internals did improve last week, particularly as Bernanke re-emphasized confidence in the economic recovery, while at the same time saying that should things disappoint in a major way, more stimulus would take place. High beta stocks which have broadly lagged for the past few months caught a strong bid, which is a good sign from a risk-sentiment standpoint. Our ATAC (Accelerated Time And Capital) models remain largely "risk-off" but less so than the past week. More time is needed to see if the next wave higher from here is coming, or if markets go flat for a bit longer before another leg up. Correction odds still remain high, but there is no denying recent improvement internally within risk assets. Given that our models are run on a weekly basis and the speed under which conditions can alter, I suspect at some point in May we will return to a full risk-on position.
As to the "Sell in May, Go Away" mantra, I don't believe it will take place this year. If I am correct in making the analogy that 2012 is a year of reflation similar to 2003 and 2009, then stocks likely can continue pushing higher all year long. I will be addressing this in my writings next week, but suffice it to say that if everyone believes something will happen, it likely will not. As with the Summer Crash, Fall Melt-Up, and Winter Resolution ideas, contrarianism must be based on intermarket trends and anticipating the anticipation of others. As I said on Bloomberg, the contrarian trade is no longer one about stock market direction. The contrarian trade is one about time.
Michael A. Gayed, CFA
Chief Investment Strategist
Pension Partners, LLC
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Summary of Writings Published Last Week:
The Lead-Lag Report: Correction Odds Remain Elevated - http://www.minyanville.com/business-news/markets/articles/health-care-financials-materials-consumer-discretionary/4/25/2012/id/40598
Oil to Retailers: Pay Attention - http://www.minyanville.com/sectors/energy/articles/oil-prices-oil-retail-retailers-risk/4/26/2012/id/40627
Is the Mini-Correction Over? - http://www.marketwatch.com/story/is-the-mini-correction-over-2012-04-23
Apple, Tech to Lag Financials in Market Boon - http://www.marketwatch.com/story/apple-tech-to-lag-financials-in-market-boon-2012-04-25
Trading Central Bank Paranoia - http://www.marketwatch.com/story/trading-central-bank-paranoia-2012-04-26
Look for a Surge in China Stocks - http://www.marketwatch.com/story/look-for-a-surge-in-china-stocks-2012-04-27
Natural Gas: Has the Extreme Happened? - http://seekingalpha.com/article/520741-natural-gas-has-the-extreme-happened-redux
REITs Take Control in April - http://seekingalpha.com/article/532601-reits-take-control-in-april
Government Seems Determined to Hold Back India with Imminent Legislation - http://emergingmoney.com/bric/government-seems-determined-to-hold-back-india-with-imminent-legislation/
Asian Emerging Markets are Doing All the Winning - http://emergingmoney.com/bric/asian-emerging-markets-are-doing-all-the-work/
If Hungary Gets a Bailout, it May be a Catalyst for Austria ETF - http://emergingmoney.com/analysis/if-hungary-gets-a-bailout-it-may-be-a-catalyst-for-austria/
Betting on Natural Gas? Bet on Coal Instead - http://www.forexpros.com/analysis/betting-on-natural-gas%20-bet-on-coal-instead-121072
European Financials Winding Up for a Big Move - http://www.forexpros.com/analysis/european-financials-winding-up-for-a-big-move%20-121588
Why Biotech Investing is So Hard - http://www.investorplace.com/2012/04/why-biotech-investing-is-so-hard/
Euro Bear? Short Emerging Currencies - http://realmoneypro.thestreet.com/articles/04/23/2012/euro-bear-short-emerging-currencies
Trouble by the Pound - http://realmoneypro.thestreet.com/articles/04/26/2012/trouble-pound
The BoJ is Out of Bullets - http://realmoneypro.thestreet.com/articles/04/27/2012/boj-out-bullets
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.