“In the business world, the rearview mirror is always clearer than the windshield.” – Warren Buffett

It is quite common for people to focus their entire lives honing in on their craft and profession, working tirelessly to build up a nest eggs through years of labor, only to spend a couple of minutes looking at their finances and understanding the investment management process.  We live in the small sample, while markets live in the world of large data and mega cycles.  Because we live in a world where never before have there been so many distractions at once, the average attention span for anybody putting money to work is quite literally a few days.

People care only about what’s after the equal sign, rather than before.  This is extremely evident looking at the SSRN page for our 2014 Dow Award winning paper (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2417974).  Despite the paper’s findings being substantial in terms of a documented anomaly that has persisted since 1926, it only has 7,453 downloads as opposed to 37,000 abstract views.  Looking at a chart that represents a small sample of time somehow has more weight than that paper that spans decades, and which looks into what goes into our risk trigger for rotations in our alternative and equity mutual funds and separate accounts.

And yet, wealth creation is a process beyond the current day, month, or year.  To think that years like 2013 are normal is factually wrong given market history in the context of magnitude of the move for stocks, smoothness, and relative behavior for everything else around developed equities screaming deflation.  To think that years like 2014 are normal is also factually wrong, given the strong correlation between Treasuries and large-caps, abnormal leadership in defensive sectors, and the spread between small-caps and large-caps.  The market is NOT just the S&P 500, or the Dow.  The market is a term encompassing multiple asset classes and stocks.  On CNBC Thursday, before I came on-air, there was a segment on how the S&P 500 is an ideal and wonderful index.  I’m pretty sure you could have said the same thing about the NASDAQ in 1999, Emerging Markets in 2007, and Oil in the middle of 2008.

With all that said, let’s look at what’s happening in the here and now based not on small samples, not on headlines, and not on emotion.  Rather, let’s look at things from a purely objective, quantitative standpoint.  Prior to the end of September, correlations within and across markets were abnormal relative to history, largely due to Quantitative Easing as a distorting factor.  In October, stocks became very volatile, and BEFORE that volatility hit our alternative inflation rotation strategy positioned into Treasuries, while our equity beta rotation strategy positioned all-in on Utilities, Consumer Staples, and Healthcare.

That trade worked beautifully, consistent with our own award winning research (which I continue to stress people need to read).  Our alternative strategy went up nearly every day as Treasuries became negatively correlated to equities into that unrelenting decline for stocks, consistent with historical behavior.  Our beta rotation strategy outperformed as money rotated to defensives.  Then stocks V-ed.  Treasuries remained strong on a rolling basis alongside defensive sectors.  Because this is part of our risk trigger, we did not change positions.  Our inflation rotation strategy missed the right side of the V in stocks, which is fine given that it also missed the left side.  Our equity beta rotation strategy continued to hold strong as defensive sectors held and V-ed alongside broader markets consistent with asset class strength.

Two different strategies, two different return stream purposes, one main goal: to manage downside risk in periods of heightened and prolonged stock market stress.  This happens to have been a long period without any real stock market stress despite risk triggers warning several times that such stress was coming.  It is easy to be angry about that with the benefit of hindsight, but the rearview mirror doesn’t tell you what the conditions were for an accident.  Only driving forward does.  For us, the path of market movement needs to adhere to historical cause and effect.  The return to those relationships is indeed happening, and only just beginning.

The first major relationship that could kick in?  Seasonal weakness in Treasuries, and seasonal strength in stocks.  Our models in the near-term see this as a distinct possibility.  That sets us up for a potentially strong close in both strategies should conditions stick and intermarket trends persist.