The End of 2013 and the Return of Risk Management

It is only three weeks into the New Year but investors should already be waking up to the fact that this is not 2013. At this point last year, the S&P 500 was already up over 4% year-to-date, never looking back from the first trading day of the year. As we have emphasized repeatedly, last year was an anomaly for the markets in terms of unusually low volatility and U.S. equities ignoring normal intermarket relationships.  As we stressed at year-end, 2014 is likely to look much different and investors and asset allocators should be careful not to extrapolate the behavior of 2013 into the future.

Thus far we have seen just that, with the S&P 500 showing back-and-forth action over the first few weeks and currently down year-to-date.  At the same time, many of the losing trades from last year, including Gold/Miners and Bonds are up on the year. We are also beginning to see a return to normalcy in intermarket relationships, which should be favorable for our ATAC strategies.

The key question for early 2014 is whether inflation expectations will synch up to U.S. equities or whether U.S. will synch down to lower inflation expectations. The jury is still out on this question but over the past week we’re seeing increasing signs of risk-off behavior:

1)    Inflation expectations are once again trending lower.

2)    The ratio of bonds to stocks is rising for the first time in months.

3)    The ratio of defensive areas such as Utilities is showing improvement relative to the market.

4)    The ratio of high yield credit to U.S. treasuries is showing some signs of weakness.

5)    The ratio of industrial metals such as Copper to precious metals such as Gold is declining.

6)    Consumer Discretionary stocks in general and retailers in particular are showing significant weakness for the first time in months.

Overall, this behavior is suggesting that there is an increased risk of a correction in the equity markets. Our ATAC models used for managing a mutual fund and separate accounts are also sensing a potential deflationary pulse, and at the end of last week we rotated into bonds.

Related Articles:

January 21, 2014: Great Rotation Back to Bonds?

January 16, 2014: A Quiet Collapse Which Requires Attention

January 15, 2014: Risk Signals Building, But Tops Take Time To Build

January 10, 2014: 4 Key Market Charts to Watch in Early 2014

January 7, 2014: The Challenge of Investing After an Abnormal Year

January 3, 2014: Gold Has Its S.O.S. Moment, and It’s Bullish

January 2, 2014: Investors Are All-In on US Stocks

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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