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Wal-Mart to Bears: You're Wrong


Wal-Mart investors have gotten so scared that they may be the ultimate contrarian signal.


Stand with anybody that stands right; stand with him while he is right and part with him when he goes wrong.
- Abraham Lincoln

In my more recent analysis, I've been bringing attention to market internals, which on many levels have been behaving as if a Lehman-like event has already occurred, and teasing out the idea that we may be in a set-up very similar to the Fall Melt-Up of 2011. My premise here is simple. Back in April, I began making the case that a mini-correction was likely, and that if I was right, stocks would act resiliently (the S&P 500 (IVV) has not once hit negative year-to-date territory so far), which would further the case for my "Spring Switch" thesis. Admittedly, the odds of the "Great Re-Allocation" happening during the spring have diminished substantially, but the mini-correction seems to have been correct so far.

A few weeks ago, I began sounding the alarm about credit spreads through junk debt (JNK) and emerging market debt (EMB) breaking down substantially relative to Treasuries (TLT). My observation was that the breakdown was meaningful enough that it increased the odds of a crash, and that it was not my base case scenario (see my CNBC segment explaining this on May 23). It was meant to be a very short-term observation. And while equity markets did not collapse, market internals have behaved as if a crash and significant decline actually occurred.

Here we are and I am struck that no one talks about the immense fear that has been priced in. Bond yields worldwide are far below inflation rates. We are at the point where fear is so high that return of capital has taken precedence over return of purchasing power. And if you don't believe me when I say that the entire market internally has gotten scared in a way that suggests a crash has happened, maybe you'll believe Wal-Mart (WMT).

Take a look below at the price ratio of Wal-Mart relative to the S&P 500. As a reminder, a rising price ratio means the numerator/WMT is outperforming (up more/down less) the denominator/IVV.

Notice the absolutely immense speed of outperformance Wal-Mart has exhibited. The move has sent Wal-Mart back to 2009 levels relative to the S&P 500. But the speed of the move is as if an event has occurred. Why? Because Wal-Mart tends to outperform in a serious correction and decline. Now what if the event does not happen? What if Wal-Mart's outperformance, and the speed of that move, is unjustified because the apocalyptic talk everyone is expressing won't pan out, at least for now?

My firm's ATAC models (accelerated time and capital, a quantitative system based on inflation expectations) remain largely in bonds after having been in stocks in the first quarter, and it does appear that we are likely to go fully back into equities in the next two to three weeks. Given the relative ratio behavior, which has acted like there has been a severe breakdown already in financial markets, a sudden realization that the event may not actually occur could cause a significant rally in stocks...and that gets me very excited.

The Rocky Balboa stock market may be back and looking to start swinging again.

Twitter: @pensionpartners
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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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