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Michael Gayed: A December Massacre for the Stock Market?

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Given the history of how stock market collapses happen, we may be ripe for a shock move lower.

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I like the serendipitous surprises of reality.
-Lawrence Wright

It never ceases to amaze me how people take the past for granted, blindly assuming the future will be fine based on recent history. 

I wrote this on an airplane after seeing something that made me shake my head before boarding.

While waiting to get my cup of joe, I happened to glance at the newspapers and saw one that said "Outlook 2015." 

It hit me right then and there that everyone seems to be closing the books on 2014, assuming that stock gains are a done deal. 

Why? Because of the so-called "Santa Clause Rally" and generally favorable seasonality for equities in December.

This is exactly when major collapses happen -- when you least expect one. 

Just because a December Massacre/stock crash has never happened before does not mean it can't now. As a matter of fact, that is exactly why we may be on the verge of a severe and historic move. Credit spreads have been widening at a relentless pace. Oil is in full-blown crisis mode, sending Russia (RSX) and many emerging markets (EEM) into panic mode. 

Inflation expectations? Don't even get me started. The Fed has completely failed at achieving its inflation targets.

I can't tell you how many people in this business believe long-term wealth generation comes from the frequency of profitable trades, rather than the avoidance of substantial downdrafts. Alpha comes from reducing downside, and not by being up more. It is for this exact reason that my recent presentations around the country are focused on anticipating conditions that favor stock market corrections and volatility. 

We have been in a prolonged period of time where risk triggers like those used in our alternative inflation rotation and equity beta rotation mutual funds and separate accounts have simply not performed. 

If there ever were a time for this to change, now is it.

One of the inputs that go into our risk trigger is documented in the 2014 Dow Award winning paper "An Intermarket Approach to Beta Rotation". 

Take a look at the price ratio of the iShares Dow Jones US Utilities ETF (IDU) relative to the S&P 500 SPDRs ETF (SPY).


Click here to enlarge

As a reminder, a rising price ratio means the numerator/IDU is outperforming (up more/down less) the denominator/SPY.  Note the pulse of strength happening on the far right now.

Utilities' outperformance tends to precede corrections, drawdowns, and volatility.  Prior pulses have not resulted in such broad market stock market behavior afterwards except for brief moments in time. 

Maybe, just maybe, the signaling power works right now. Given the history of how stock collapses happen, we may be ripe for a shock move lower.

Outlook 2015? 

2014 ain't over yet...

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
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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.

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.

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