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The question that scares the bulls and the Fed
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The question that scares the bulls and the Fed

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The question that scares the bulls and the Fed

Inter-market movement continues to look more and more fragile with several negative trends expressing themselves. I have been noting in my last few writings that bonds are strengthening despite the "rising rate environment" meme and that behaviorally things are acting more normal.

Big down days result in defensive, low-beta leadership. Big up days are the opposite, as more aggressive areas uniformly outperform. However, unlike 2013, the relationships are normalizing within the market. I'm pretty excited for that, as those who remember my major calls in 2011 and 2012 may soon recognize a more familiar market.

The yield curve is flattening, and the payroll report did change many things beneath the surface. Our ATAC models used for managing our mutual fund and separate accounts fully got out of our stock exposure last week and are now in full deflation pulse mode through a trade in duration.

Contrarian? Yes. But the fact is that the reflation disconnect which threw off many dynamics last year remains very much in place. The Fed has begun to acknowledge the risks of QE, small-cap stock valuations, and has started to pull back on bond buying. Meanwhile, P/E expansion of last year looks more and more suspect with some disappointing results in the large-cap space.

Every single Nouveau Bull who got last year right needs to start asking one question and one question only: If the Fed's wealth effect were effective, why are consumer stocks suddenly collapsing at the same time China's manufacturing and exports are surprisingly weak?

The entire Fed strategy all along is to try to juice the value of assets on the hopes that it makes people "feel" better about their financial situation, spend more, and create a virtuous cycle of growth through increased velocity of money. Wouldn't you think that after such a strong 2013 that consumers would go spending like mad and growth would seriously pick up? Wouldn't that mean retailing stocks would do well?

It's not happening. This is a fragile juncture purely because if the market begins to realize that the Fed was actually ineffective in juicing reflation, and growth/earnings do not pickup, then last year was unjustified. Retailers bottomed before the March 2009 low. What does it mean then if they just topped, something which I alluded to on Bloomberg at the very end of December?

Take a look below at the price ratio of the SPDR S&P Retail Index ETF XRT +0.12% relative to the Consumer Discretionary Select Sector SPDR ETF XLY -0.71% . As a reminder, a rising price ratio means the numerator/XRT is outperforming (up more/down less) the denominator/XLY. A falling ratio means the opposite. For a larger chart, please click here .

Yes, consumer stocks have been weak. But retailers have been brutal in the last few weeks. Wealth effect? Mission accomplished? Reflation? Bull market? Not so much. If, indeed, consumer stock information gradually diffuses to broad market averages (a concept brought about in two white papers I will be releasing shortly), then shouldn't the Gray-Haired Bears be salivating over what's to come?

The question that scares the bulls and the Fed - MarketWatch

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