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Week in Review – October 2, 2011

|Includes: DIA, EEM, EFA, iShares Core S&P 500 ETF (IVV), IWM, SPY
“It is an endless procession of surprises.  The expected rarely occurs and never in the expected manner.” – Vernon A. Walters
I can promise you that you are not the only one.  Markets worldwide went through some of their worst losses in years.  Emerging markets, small-cap U.S. stocks, commodities – it is as if in the blink of an eye we find ourselves back in time to 2008 once again.  Who is to blame for all this? Some will naturally blame the President, others will blame it on the downgrade of U.S. debt from AAA status, and likely the vast majority will blame it on the Eurozone.  
Whatever caused us to get to this point, we’re here now and everyone is justifiably afraid to put money to work in this environment.  On a worldwide basis investors seem to have taken a “fool me once, shame on you, fool me twice, shame on me” type of attitude.  After having been burnt so badly in the 2008 meltdown, everyone is so quick to pull out of markets to avoid those losses from happening all over again.  The level of negative sentiment is absolutely enormous, with redemptions in the hedge fund community occurring at a breathtaking pace.
It seems to me that we are very near the edge of the unexpected.  Think about that statement for a second, because if you agree, that means its time to be bullish.  The whole world has thrown in the towel on believing markets can rally in one fell swoop.  Everyone is expecting another Lehman-like moment in Europe, where the entire financial system freezes up and markets collapse again. While it certainly can happen, does it happen right here, right now when everyone is thinking it will?
I’m a huge fan of behavioral finance, and a bit of a nerd when it comes to looking at psychology experiments.  Studies show that people overestimate the probability of something happening when its explained to them.  Think about that for a moment. If you turn on the financial media and listen to all the talking heads explain what’s going on to markets and to Europe, you likely are overestimating the outcome simply because of the narrative being spoken on screen.
I find this rather amusing. Everyone is bearish, everyone is in favor or defensive sectors (Utilities, Healthcare, Consumer Staples), and yet I find myself asking where these people were back in February when I first called for a deflation pulse to occur this year.  Where were these people back in June when I first wrote about a Summer Stock Market Crash (
I have now turned the complete other way. I believe we may be headed for a Fall Melt-Up, or Great Surprise ( I encourage readers to take a look at the article for my reasoning, but the conclusion is what matters.  Markets have behaved worldwide like a Lehman event has occurred, when in reality it has not (certainly not yet).  The “Great Surprise” then would be that something positive occurs, pushing risk assets higher in the near term.  This seems to almost be the perfect set up to have this happen given the level of bearishness and redemptions occurring by investors.  Markets have a funny way of rallying with the least amount of people participating.
We are actually quite excited for this possibility. However, let me make the following very clear.  At Pension Partners, we use backtested “buy and rotate” models to position our client accounts.  The philosophy and my approach in all that I write is very similar to the core approach of our ATAC (Accelerated Time And Capital) models, however they do not always line up perfectly.  My objective in all of my writings is to put a spotlight on markets using inter-market analysis – to address the what and possible why for a move.  Our models are designed to address the when – and the when is based on quantitative ways of determining if the conditions favor risk on or risk off. I spoke about this just last week live with Liz Claman on Fox Business (  Please keep in mind I had a raging sore throat during that interview!
I noted in last week’s newsletter that we had the “mother of all false signals” positioning into equities just as the worst week since 2008 hit, and that as a results we flipped back into bonds once our models adjusted for the deterioration.  We are still in that position, but the same underlying dynamics that caused us to position into equities are once again starting to tease us that a very real move in stocks higher may be coming.  
We are working hard at our second major launch for the month of October, which is actually showing what the backtested results are of our ATAC models which we run our decisions off of.  September was the month in which we launched actual ATAC performance for our clients.  By showing what our backtesting reveals about our quant strategies, we hope to provide more clarity to those interested in our alternative approach to investing. Make no mistake about it – markets may be partially efficient internally but are not as efficient externally (across asset classes).  Our strategies are designed to exploit some of those disconnects using Exchange Traded Funds (ETFs).
We continue to push through in an otherwise extremely difficult environment as evidenced by the substantial losses legendary hedge fund managers have undergone this year. We believe in our approach, our strategies, and ourselves, and are confident that when the turn officially comes, we likely will be one of the few participating in it.
Michael A. Gayed, CFA
Chief Investment Strategist
Pension Partners, LLC
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.