There is no pain you are receiving…

The market has become comfortably numb to negative headlines or the virtual certainty that negative headlines are on the near-term horizon. We already know for a fact that the hard decisions regarding the Cliff have been pushed off until February and March – and that the only thing between now and then is an earnings season that no one seems to be particularly enthusiastic about. And yet, there is no pain; the melt-up continues, borne on a cresting wave of dollars and fund flows and not thanks to any amelioration in underlying fundamentals.

But these issues do not seem to be able to staunch the bleeding out of short-term fixed income vehicles and into the equity market. Once it became apparent that systemic tail risk was no longer going to be the driving factor behind global buy and sell decisions, money came flying into stocks in a hurry.

The bad news is that we are short-term overbought in almost all sectors and major averages. The good news is that we are likely at the beginning of a major reallocation trade, one that’s been years – and trillions of dollars in mis-allocated funds – in the making.

My friend Dynamic Hedge agrees with me on this…

News of a sluggish economy persists and yet billions of dollars are pouring into stocks…Investors who had hedged up before the end of the year were forced to unwind some protection and reposition.  The big news is the reaction in the treasuries market.  Money is slowly starting to rotate out of safe assets and into risk assets.  We are at the very beginning of a big trend here.  All those historic inflows into fixed income we’ve been hearing about over the last couple years will eventually cycle back to equities.  The only question is in the timing.

The timing matters little to me. The trend is too big right now, too inescapable. Art Cashin has been watching this ebb and flow from the floor of the New York Stock Exchange since the Cuban Missile Crisis (a buyable event, as he likes to remind listeners during that particular anecdote’s telling). He’s got a similar opinion, keeping a close eye on interest rates in the mortgage market as the thing that that will squirt lighter fluid on the flames.

Even many perma-bears are admitting the path of least resistance is probably higher for now (while they complain about the reasons for it out of the other side of their mouths). A well-known long-short market commentator has joined the rotation-into-equities bandwagon as well – he’s embroidering his newfound constructivism with economic mumbo-jumbo, but still.

Whether or not we get a pullback is not the issue – we will. RSIs are getting overheated here and the Vix looks like it’s been riding shotgun with Billy Joel. The bigger question will be how one reacts to it when it arrives. My opinion is that weakness, if and when it arrives, will be met with a wall of wayward cash coming from Bondland. I’ve been making this case for a while now and it’s one of my top three themes for 2013 as set out last month.

Outside of consumer resilience and the now-undeniable housing market recovery (Bill McBride is looking for a doubling of housing starts over the next few years), there are many pieces of the puzzle that have not fallen into place yet. But if they do, the trickling rotation from bonds to stocks could quickly become a torrent after so much doubt and loathing.


Marketview: Bear Carnage (Dynamic Hedge)

How much will Residential Investment increase? (Calculated Risk)

ART CASHIN: The End Of The Bond Bull Market Will Be Signaled By A Stampede (Business Insider)




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