Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Michael Gayed: The Stock Market's Behavioral Correction Has Begun

By

By the time you realize something's broken, it's too late.

PrintPRINT
Editor's Note: Michael Gayed will be appearing at T3 Live's Finance Festival, hosting a special breakout session on How Inflation Expectations Will Shape 2016.

Read More About It Here

"Behavior is the mirror in which everyone shows their image."

-Johann Wolfgang von Goethe

Last week marked the start of some very important price action in risk assets.

Media and biotech stocks broke hard, small caps sliced through support levels, and some longer-term moving averages began turning lower.

As Pension Partners' Director of Resarch Charlie Bilello (our Director of Research) noted in his most recent blog post, a "revenue recession" may be underway as S&P 500 sales appear to be on-track for their second straight quarter of year-over-year decline.

To reiterate a point we made last week, the conditions that surround us are not ones that result in debate over when the Fed will hike rates, but rather when the Fed will ease.

The great unraveling of central bank omnipotence may finally be underway as Mr. Market begins to realize that money printing medicine isn't translating into a healthier fundamentals.

Meanwhile, the bond market is sending a powerful message.

On the surface, Friday's payroll report suggests that the Federal Reserve will likely raise rates in September as hiring continues along its mediocre pace.

Stocks fell and long-duration Treasuries rallied on that to cap off the week with meaningful yield curve flattening.
This is important.

The bond market seems to be anticipating that disinflationary and anti-growth pressures are rising. This is problematic for the Federal Reserve because if they do raise short-term rates in September, the long-end of the curve suggests it could be a significantly negative force.  In turn, that would increase volatility in risk assets to the point that monetary policymakers many rethink the robustness of economic activity.

This in turn should also make the stock market doubt its own discounting of a future which never comes. As proven in our award winning paper which you can download here, stock market volatility tends to rise after such price action in Treasuries takes place.

With small-caps, emerging markets, commodities, credit spreads and inflation expectations all faltering, one has to ask the question if the summer correction is now underway.

Generally, in a declining and volatile equity market, cyclical stocks underperform defensive sectors and long duration Treasuries begin to significantly, in a short-period of time, rocket past equities in terms of relative performance. Behaviorally, this is already happening.

Our alternative and equity strategies have had a strong run as of late precisely because of this defensive positioning as the magnitude of being right defensively potentially swells the frequency of being right offensively. Interestingly, no one seems ready for it.

Many asset allocators believe that "if it ain't broke, don't fix it" when it comes to US stocks. The problem with this, as history and numerous studies show, is that by the time one realizes just how broken equity market are, it's often too late to do anything about it.
The next two months will be quite important.

If the behavioral correction has indeed begun and leads investors into the long-awaited actual correction with stocks dropping significantly off their highs, then the 2012 playbook for managing risk can lead to a substantial run for tactical allocators.

Coming out of such a juncture could be quite interesting as well. Capitulation is likely to still come in commodities and emerging markets as US equities hold on to a belief in something which has not materialized. After the eventual price readjustment and washout occurs, there could be a melt-up in everything else around US stocks coming out of the summer correction. That would end the cycle of US stock market dominance against everything else around the world.
Your Defensively Positioned Investment Strategist,

Michael A. Gayed, CFA

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.


Twitter: @pensionpartners
< Previous
  • 1
Next >
No positions in stocks mentioned.

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.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE