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The Stock Market's GDP Denial Could End Badly


Looks like the bond market may be right after all.

Denial ain't just a river in Egypt.
--Mark Twain

So let me get this straight: The GDP revision for first quarter came in far worse than economist estimates, and the stock market simply doesn't care?  Enough with the weather excuse.  Enough with the Russia excuse.  The bond market since day one of this year has been pessimistic on the economy.  So far, data proves that Treasuries are right.  Something is very much amiss in the narrative that stocks continue to put false belief in, and the way deflation trades are behaving.  This is no longer opinion.  This is no longer conjecture.  We cannot simply turn a blind eye to data that is weak and argue that all bad news is good news for stocks.  At some point, bad news is bad news. 

At some point, volatility will rise from the ashes of complacency.

The biggest and most disturbing thing thus far about the stock market's denial of the economy is the stock market's denial of itself.  Utilities have been remarkably strong all year, albeit in most recent days weakening just a bit at the margin.  Treasuries have been shockingly strong.  More problematic than all this, however, is the market internally not believing in the consumer anymore.  We all know just how important consumer spending is to the economy.  A healthy economic environment should be led by stocks, which are most sensitive to the economy.  Conversely, when consumer stocks are weakening, the market may be anticipating some kind of slowdown more broadly ahead, which equity averages would then act with a lag to.

That's kind of happening, isn't it?  Take a look below at the price ratio of the SPDR S&P Retail Index (NYSEARCA:XRT) relative to the S&P 500 ETF (NYSEARCA:SPY).  As a reminder, a rising price ratio means the numerator/XRT is outperforming (up more/down less) the denominator/SPY.  This is one of the uglier relative charts that one can view markets through the lens of, and is sending a clear message: Stock market denial is real and can only persist for so long.

My firm's ATAC (Accelerated Time and Capital) models used for managing our mutual funds and separate accounts are getting considerably closer to another defensive rotation. The complacency occurring in the here and now is utterly stunning, and several intermarket trends are sending the same message.

Denial can keep asset prices afloat, but at some point even the most stubborn of risk-takers will learn the hard way that risk management needs to be done before the decline occurs -- not after.

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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