One can get a sense of whether a manic phase in the uptrend is underway based on pockets of stocks which exhibit irrational outperformance.
The two areas which have been the attention for speculators have been Biotech and Social Media.
If Social Media stocks keep faltering, it would mean risk sentiment in high flying stocks is unable to stick.
“Sometimes being a friend means mastering the art of timing.” – Octavia Butler
Often times in bull markets, one can get a sense of whether a manic phase in the uptrend is underway based on pockets of stocks which exhibit irrational outperformance. As these industries bubble up, their movement becomes a signal of risk sentiment as bulls control price independent of logic, fundamentals, and rational investor behavior. Of course this ultimately gets reversed in time. After all, gravity has a funny way of bringing stocks down from the stratosphere.
The two areas which have been the attention for speculators have been Biotech and Social Media, the latter of which is particularly interesting to focus on given hype over companies like Twitter (NYSE:TWTR). Many of these stocks went vertical in the second half of 2013 as valuations became extreme. Since then, 2014 has sent many of these company stocks lower in as violent a fashion as they rose. Their behavior is consistent with money rotating into defensive areas like Treasuries and low beta sectors which have a larger market capitalization on average.
When areas at the leading edge of risk diverge from markets, it’s worth paying attention to. The behavior of Social Media stocks recently confirms the idea that the correction may not be over, as our own alternative ATAC Inflation Rotation Fund (TICKER: ATACX) resyncs given a clear change in intermarket behavior crucial to the success of our risk trigger that causes us to rotate fully into equities or Treasuries. Take a look below at the price ratio of the Global X Social Media Index ETF (NASDAQ:SOCL) relative to the S&P 500 SPDR ETF (NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/SOCL is outperforming (up more/down less) the denominator/SPY. A falling ratio means the opposite. Note the breakdown on the far right, indicating a renewed period of weakness may persist into the end of the year.
What is the implication of this? If Social Media stocks keep faltering, it would mean risk sentiment in high flying stocks is unable to stick, which in turn may mean speculators are weak hands when it comes to further advances in overall high beta equities. This would serve as a drag on the idea that stocks rally into year-end. Given their weakness into the V formation for the S&P 500 itself, it is worth asking if the traditional Santa Clause rally for equities comes this year.
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 Fund’s investment objectives, risks, charges, expenses and other information are described in the statutory 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 atacfund.com. Please read the Prospectuses carefully before you invest.
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.
The fund as of 10/27/2014 does not invest in any of the following investments: TWTR, SOCL, and SPY. Fund holdings are subject to change and are not recommendations to buy or sell any security. Current and future holdings are subject to risk.
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
MA(4) = 4 week moving average
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ATAC Inflation Rotation Fund is distributed by Quasar Distributors, LLC. No other products mentioned are distributed by Quasar Distributors, LLC.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. (More…)