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Michael Gayed: The One Certainty When It Comes to Markets


At extremes, the biggest money is made by the few who are brave enough to counter the obvious.

For my part I know nothing with any certainty, but the sight of the stars makes me dream.
-Vincent Van Gogh

Whenever the investment community believes with 100% vigor that the future is known, it's time to start thinking the other way. At its core, contrarianism is about identifying the most extreme certainties, and positioning for the opposite under the idea that the bigger payouts occur when fewer people are betting on the pot.

Certainly the crowd tends to be right on average, but at extremes, the biggest money is made by the few who are brave enough to counter the obvious. The one certainty when it comes to markets is the idea that extremes reverse, as cycles change and new leadership emerges.

It is never easy to identify extremes, except perhaps through the length of time a particular narrative has been told. I believe the last three years can be summed up very easily. It's been an environment where most investors believed:

1) The Fed is good for stocks.
2) There is low volatility. 
3) US large-caps are the only real place to make money.

The conviction in the continuation of these three truths makes the long-term actually quite predictable -- simply flip everything to its opposite. The next few years are more likely to be characterized as one where the Fed is actually detrimental to the US story, there is higher volatility, and large-caps are no longer the only game in town.

Because we live in the small sample of the day-to-day however, it is extremely hard to wait for that future to come as we hold on to the certainty of the past as an anchor for the future. So we keep grasping on stubbornly when logic dictates that we shouldn't.

The S&P 500 SPDRs ETF (SPY) declines? Buy the dip!

Fed is going to keep rates lower for longer? Bullish!

It has become too obvious, and as such then cannot possibly be a way to generate long-term wealth. Just because the crowd is right on average doesn't mean that that is the most efficient way to make money. After all, if investing with the crowd were a way to generate wealth, everyone would be much richer than they are now.

From the standpoint of quantitative research which does not rely on narratives, the near-term has been dominated far more by pulses of emerging market strength, and defensive positioning.

The indicators used to manage our Morningstar 4 Star overall rated ATAC Inflation Rotation Fund (Ticker: ATACX, rating as of 9/30/15 among 234 Tactical Allocation Funds derived from a weighted average of the fund's 3-year risk-adjusted return measures) have largely avoided US equities this year as momentum fails to stick despite the narrative still expressed by others about the future.

While our strategies are largely built off of short-term indicators and not off sentiment, qualitatively, it makes sense to believe that this is more likely to continue for some time given extreme conviction about how the future will look by the vast majority of market observers.

The best retrospective thoughts based on market behavior week over week come not from the week over week performance of the market, but the underlying thread of belief that drives market movement on average. We can talk about what happened that caused stocks to go up or down in the last 5 trading days, but it is much more helpful I believe to take a bigger picture view of where we are in the cycle, and how to make money off the next one.

It is impossible to know the exact moment that change happens, but we can begin to train ourselves into preparing for it mentally before it's too late.

Some can do this following metrics like those discussed in our research papers (click here to download).

The majority, however, need a new story to replace the old one we're so used to reciting.

Twitter: @pensionpartners

Opinions expressed are those of the author and are subject to change, are not intended to be a forecast of future events, a guarantee of future results, nor investment advice.

The Fund's investment objectives, risks, charges, expenses and other information are described in the statutory or summary prospectus, which must be read and considered carefully before investing. You may download the statutory or summary prospectus or obtain a hard copy by calling 855-ATACFUND or visiting Please read the Prospectuses carefully before you invest.

For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating™ (based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund's monthly performance including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.) The ATAC Inflation Rotation Fund was rated against the following numbers of U.S.-domiciled Tactical Allocation funds over the following time periods: 234 funds in the last three years for the period ending 9/30/15. With respect to these Tactical Allocation funds, ATAC Inflation Rotation Fund received a Morningstar Rating of 4 stars for the three-year period. Past performance is no guarantee of future results.

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Mutual fund investing involves risk. Principal loss is possible. Because the Funds invest primarily in ETFs, they may invest a greater percentage of its assets in the securities of a single issuer and therefore is considered non-diversified. If a Fund invests a greater percentage of its assets in the securities of a single issuer, its value may decline to a greater degree than if the fund held were a more diversified mutual fund. The Funds are expected to have a high portfolio turnover ratio which has the potential to result in the realization by the Fund and distribution to shareholders of a greater amount of capital gains. This means that investors will be likely to have a higher tax liability. Because the Funds invest in Underlying ETFs an investor will indirectly bear the principal risks of the Underlying ETFs, including but not limited to, risks associated with investments in ETFs, large and smaller companies, real estate investment trusts, foreign securities, non-diversification, high yield bonds, fixed income investments, derivatives, leverage, short sales and commodities. The Fund will bear its share of the fees and expenses of the underlying funds. Shareholders will pay higher expenses than would be the case if making direct investments in the underlying funds. All investing involves risks.

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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.

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