by Michael Gayed, CFA, Portfolio Manager, Pension Partners
âI respectfully decline the invitation to join your hallucination.â â Scott Adams
Last week, several indicators began flashing warning signs for the bulls, suggesting conditions are no longer favoring near-term upside in stocks.
There are a few things Iâve been recently noting on my Twitter account (@pensionpartners) which are concerning. First, consider that the vicious V off of the December lows in the S&P 500 has not caused a significant breakdown in Utilities or Treasuries, both historically leading indicators of volatility. As a matter of fact, Utilities have been oddly strong relative to all other sectors against their respective moving averages.
When it comes to Treasuries, the real issue here is that inversion just doesnât want to go away.
I know everyone is concerned about yield curve inversions. And for good reason.
The problem with any analysis like this of course is that while every recession may have historically been preceded by an inverted yield curve, that does NOT mean that an inverted yield curve always precedes a recession. I have no clue if we are entering a recession or not. Personally, Iâm not convinced as I believe thematically reflation this year is more likely than not. However, in the very short-term, there is a lot of intermarket movement which is troubling and may be suggesting the V is over. While this may or may not be a âbull trap,â it is worth considering that history suggests violent moves off of lows like what we just experienced have happened before, and ultimately were followed by more significant declines.
Our ATAC strategies have recently turned considerably more negative on equities. Short-term strength in Utilities and Treasuries are the drivers. Our ATAC strategies are highly short-term and quantitative in nature, allowing for an unemotional and historically validated approach to identifying risk-on/off conditions. The question of whether or not a recession is coming in many ways has little to do with short-term dynamics. The one thing that does give me hope for the bulls is that emerging markets remain potentially a cycle leader.  EM strength in the past 3 months relative to the US has been notable The one thing that doesnât give me hope is the stubbornness of the yield curve to not steepen into the V move displayed by equities.
Regardless, itâs been an incredible move off of the low. It just may be time to start considering that every W formation in markets is formed first by a V. Thereâs a reason why the letter W in French is pronounced doo-bluh-vayâŠ
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.
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