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ATAC Week In Review – October 7, 2012: Refresh The Fear

"Uncertainty will always be part of the taking charge process." - Harold S. Geneen

Markets rose in the first full week of the 4th quarter as risk sentiment improved on the global front (or so it would appear). The continued theme of global monetary easing continued as Australia cut its interest rates further to spur domestic demand. U.S. economic data continues to show robust improvement, as vehicle sales accelerate to levels not seen since early 2008, and as the unemployment rate dropped to 7.8%. On the Europe front, Spain's bond yields fell and a surge in Greek stocks is signaling that money is getting comfortable with the Eurozone.

And yet, as I have been noting in my most recent series of writings and on Twitter (@pensionpartners), intermarket trends are warning of uncertainty here. As followers of our firm know, we have been highly bullish on stocks all year, even throughout the April-May "mini-correction" when we positioned into bonds to avoid the decline that happened then in equities. Forced reflation remains the most likely course of action, and in our latest seasonal call (the Fall Catalyst of 2012) we argue that markets will make new all-time highs in the next three months.

However, as I stated on CNBC (, we have to caution our followers in the very near-term. Market internals do not look that enticing here, as defensive sectors show strength. The odds of a minor correction which could send the Dow back to 13,000 are rising in the here and now, all within the context of new all time highs to come. Our ATAC models used for managing our mutual fund and separate accounts is sensing this, and has kept us considerably more defensive than we were two weeks ago.

Could intermarket trends reverse and improve, causing stocks to push higher in an unabated way? Absolutely. Our ATAC strategies are weekly oriented, and could easily position aggressively back into stocks should things improve meaningfully enough to warrant that next week. But because we live in a world of probabilities and never certainties, we respect that the odds in the here and now for a decline are rising. It would appear that next week will be an important one to see just how real a pullback could be. However, anecdotally I can tell you that the type of pushback from bulls on Twitter in terms of my short-term bearishness is reminiscent of the type of pushback I got on June 4th by bears when I argued in my writings for another stock melt-up to occur. There appears to be a strange feeling by the crowd that a correction simply cannot happen because of "unlimited" money printing. I find this to be a dangerous idea to believe in. As Ed Dempsey told me last week, now might be the time for market to "refresh the fear."

Finally, it is worth noting that year to date the S&P 500 on a total return basis is up over 18%, making 2012 one of the best years in the past decade next to 2003 and 2009. One of my more ambitious calls back in January was that 2012 could play out like 2003/2009 in terms of being a year of reflation, and which in turn could result in stocks rising somewhere in the range of 30-40% for the year. Many believed the call to be absurd, and yet we are only 10% away from that happening. Yes - it is entirely possible in the next three months markets stage one more big push, resulting in that idea coming true.

Time will tell of course. Our ATAC models are flexible enough to go into or out of stock and bond ETFs as conditions warrant. In the near-term, we are tactically defensively positioned away from stocks, but fully expect that an end of year surge can shock people back into chasing equities.

Looks like it will be an interesting Fall.

Michael A. Gayed, CFA
Chief Investment Strategist
Pension Partners, LLC
Twitter: @pensionpartners

Summary of Writings Published Last Week:

The Lead-Lag Report: October Correction Warning -

Copper Pause Signaling October Correct? -

From Hesitation to Correction? -

Wal-Mart Indicator to Bulls: Be Careful -

No -It's NOT the Romney Rally -

Spain Weakness Returns -

Are EM Currencies Sending Risk-Off Warnings -

The Extreme Movers Message -

Homebuilders Tired Post QE3 -

Need vs.Want Trade Warning of a Correction -

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.