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Never have I ever seen so much conviction over how the future will play out under President-elect Trump (“massive bull market ahead!”). Well, actually that’s not true. The last time people were so sure about what would happen if Trump won was before he actually won (“armageddon!”).
To me, last year was a perfect reminder of how nobody knows a thing about tomorrow. Pundits and analysts appear on air and confidently project with certainty what’s to come. Too bad the evidence shows that pretty much no one gets it right. That’s okay, though. An investor doesn’t need to know the future. All an investor needs to do is get a rough sense of where the conviction is highest about that uncertain future. If the crowd believes one thing will play out, whether it does or doesn’t is irrelevant. What matters is the size of the payout for betting on the pot, split by others betting with you.
So the question then becomes from a thematic perspective, when is the time to bet on a breakdown in the crowd’s narrative? When is it time to bet on the pot no one is considering – a correction and bear market? If this whole move has indeed been predicated on Trump running the White House, then it stands to reason that the tell for when things break down may be in the behavior of the two polar opposites of his rhetoric. Trump seems to be a huge fan of Russia. Mexico? Not so much. And that sentiment is clearly visible when looking at the price ratio of the VanEck Vectors Russia ETF (NYSEARCA:RSX) relative to the iShares MSCI Mexico Capped ETF (NYSEARCA:EWW). As a reminder, a rising price ratio means the numerator/RSX is outperforming (up more/down less) the denominator/EWW.
Belief in Trump seems to mean belief in Russia’s markets and hemorrhage for Mexico’s. The trend remains intact short-term in favor of Russia and belief in Trump. But for those wondering when the next correction (inevitably) comes, it stands to reason that the reversal of Russia’s outperformance trend relative to Mexico may be a pretty good tell. Should a downtrend occur at the same time as Utilities (NYSEARCA:XLU) begin to outperform (important as a defense signal as shown in our award-winning papers), combined with surprise renewed strength in Treasuries, it may be worth betting that the Trump Bump becomes a corrective Trump Dump.
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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