"A lot of my work is a matter of reacting to surprises in life." - Alexander Wang
Rather remarkable how bad it feels out there, with the S&P 500 having an incredibly strong year of performance, isn't it?
Stocks continue their Summer Surprise, nearing the year's all-time highs as bonds begin to crack amidst what I believed would be the coming "end to the end of the world trade" I wrote of as my seasonal call in late June (http://www.marketwatch.com/story/the-end-to-the-end-of-the-world-trade-2012-06-20). Many have been arguing that the rally is finished, but I wholeheartedly disagree given that various intermarket trends are still very early in their bullish infancy. I have argued since the low of June 4th that another stock melt-up was likely, and I maintain the reasoning behind it (http://www.marketwatch.com/story/the-end-to-the-end-of-the-world-trade-2012-06-20). With so few having participated in the rally to begin with due to the strength of the negative narrative, the potential for money to chase rising stocks is increasing by the day.
What is most telling about the most recent price action in markets is the behavior of the cyclical trade, which as I have noted for the last two weeks is signaling a melt-up may be upon us (http://www.minyanville.com/business-news/markets/articles/michael-gayed-lead-lag-report-energy/8/1/2012/id/42858). Across the board it appears that those areas most sensitive to global growth expectations are beginning to lead, as Materials, Energy, Industrials, and Emerging Markets show signs of life again. This, combined with small-cap stocks which began to dramatically strengthen shortly after my article pointing out that they reached a "pre melt-up extreme" (http://www.marketwatch.com/story/small-caps-reach-pre-melt-up-extreme-2012-08-06?link=MW_latest_news), is all how a meaningful rally begins.
While the world now waits for definitive action by the European Central Bank, I think the more interesting story will be what policy actions are taken by China. With year over year inflation in the world's second largest economy having its slowest rate of gain since January 2010, it makes sense that the monetary and fiscal side have an excuse to stimulate. This may ultimately be why metals are showing interesting price behavior in the last week, alongside strength in China's ADRs themselves. Our ATAC (Accelerated Time And Capital) models are sensing this, and remain fully exposed to equities.
Despite the negative narrative, the bullish call we have been expressing has factually been the right one all year, and we are excited for the next wave higher. It appears that the timing for our mutual fund launch in September to be offered alongside our separate account composites could very well be ideal for us as a firm as we work towards providing a true buy and rotate investment approach which has never been done before in the way we are doing it.
And that's exciting.
Michael A. Gayed, CFA
Chief Investment Strategist
Pension Partners, LLC
Summary of Writings Published Last Week:
The Lead-Lag Report: Melt-Up Redux - http://www.minyanville.com/business-news/markets/articles/xle-xli-tip-ief-xlu-utitlies/8/7/2012/id/42994
Europe to Bears: You're Wrong - http://www.minyanville.com/business-news/markets/articles/VGK-IVV-s2526p-gayed-vgkivv-technical/8/9/2012/id/43072
Small-Caps Reach Pre-'Melt-Up' Extreme - http://www.marketwatch.com/story/small-caps-reach-pre-melt-up-extreme-2012-08-06
Copper Melt-Up Coming as Miners Reflate - http://www.marketwatch.com/story/copper-melt-up-coming-as-miners-reflate-2012-08-08
Metals Surprise on Inflation's Return - http://www.marketwatch.com/story/metals-surprise-on-inflations-return-2012-08-10
Spain V Takes Shake and It's Bullish - http://www.forexpros.com/analysis/spain-'v'-takes-shape-and-it's-bullish-132130
The Aussie Dollar/China Market Connection - http://realmoneypro.thestreet.com/articles/08/07/2012/aussie-dollarchina-market-connection
The Bond Message Gets Louder - http://seekingalpha.com/article/794411-the-bond-message-gets-louder
Time for a Coalback? - http://seekingalpha.com/article/800891-time-for-a-coalback
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.