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Week In Review – August 5, 2012: Disappointment = Rally?

|Includes: iShares Core S&P 500 ETF (IVV), IWM, VWO

"Disappointment is an endless wellspring of comedy inspiration." - Martin Freeman

Markets were highly volatile last week as the world waited for monetary policy announcements from the U.S. Federal Reserve and European Central Bank, both of which "disappointed" by not enacting any new policy measures. Yet, despite more continued rhetoric without action, stocks actually closed the week positive, holding on to gains made the week prior. I noted on Twitter (@pensionpartners) that market internals all week kept on improving in the face of doom and gloom coming from the media, as defensive sectors all began breaking down and bond yields began to rise.

On Monday I co-hosted Bloomberg reiterating the bullish case for stocks ( as well as the "Summer Surprise" ( On Thursday as stocks were faltering, I noted on CNBC that internals were "deceptively bullish" ( despite worldwide panic over Draghi's speech. Friday, markets undid the entire decline generated from Monday-Thursday.

Why did markets behave in such a volatile way? First, as much as media pundits argue that it was a major negative that no new policy action was taken, I take a completely different approach to this. The European Central Bank is doing PRECISELY what it needs to do, which is to remind investors that in their paranoia over a 2008 repeat, they will do whatever it takes to preserve the Euro. How can this be done in the face of Spanish bond yields which are near a tipping point? I believe the likely course of action will ultimately be an implied cap on interest rates, such that the ECB buys bonds of Spanish and Italian debt when a certain ceiling is hit. This keeps the pressure on those governments to continue austerity, but also takes off the risk of contagion through a complete buyer strike and the effects of that. This is why the VIX (a volatility gauge which tends to do well when fears over an event are rising) sold off on Thursday and Friday in an aggressive way.

I expanded on this idea Thursday morning in a lengthy interview as the news crossed in a segment which can be seen at Prevent the event, and the perception of a 2008 repeat, and the re-allocation from bonds to stocks likely takes place as money begins to take risk again. Inflation expectations based on various intermarket trends are unquestionably beginning to show signs of life again, which is a bullish environment for equities. Our ATAC (Accelerated Time And Capital) models remain fully allocated to stocks, and have only turned more bullish following last week's market action. Few are fully prepared for what could be a runaway move in stocks given the strength of the negative narrative, which as I argued in a bull/bear debate is too priced in to be right (

We remain bullish as a repeat of the Fall Melt-Up of 2011 appears likely in the near-term. I have argued since June 4th that another such move was likely, and maintain the idea that stocks can experience an "inverse Summer Crash." With sell-side analysts the most bearish on stocks since the 1980s, AAII sentiment surveys showing continued pessimism, and absolutely no belief in equities despite them being up over 11% year to date, this seems like the contrarian investors dream environment to make a bet where no one else is betting: equities.

We continue to push forward at Pension Partners, preparing for the launch of our mutual fund in September to be offered alongside our separate accounts. The countdown is on, and we are excited to provide investors with a strategy that has never been done before in the way we are doing it.

Until then, we'll simply keep the pressure and stand by our message or what the market is saying.


Michael A. Gayed, CFA

Chief Investment Strategist

Pension Partners, LLC

Twitter: @pensionpartners


Summary of Writings Published Last Week:

The Lead-Lag Report: Cyclical Melt-Up Coming? -

Energy to Deflationists: Pay Attention -

Inverse Summer Crash Takes Place -

Silver Set to Rally Amid Forced Reflation -

The Most Important Charts in the World -

Silver Miners to Love Reflation -

Despite It All, VXX at New Lows -,-vxx-at-new-lows-131955

Emerging Market Currencies Continue Risk-On Trade -

Euro Bounce in the Cards -

Did Draghi Flip the Spring Switch? -

Junk Debt/S&P 500 Switcheroo -

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.