Bear correction or bull capitulation?

I think it might be a good idea to start off with some facts and explain why I maintain that odds continue to favor a correction in the near-term.

On Jan. 25, I began arguing that a decline was coming for Nouveaux Bulls following the strong first few weeks of January post-fiscal-cliff resolution. I had been vastly bullish into the year, and on Dec. 3 even argued another melt-up was underway.

Since then, the media has hyped Dow 14,000, and I have received tweets and article comments from people who are pointing out how "wrong" I've been since then.

"The harder you work, the harder it is to surrender."

�Vince Lombardi

Here are some facts. From Jan. 25 to Feb. 19, the S&P 500 (SPY) is up 1.99%, Europe (VGK) is down 1.09%, and emerging markets (EEM) are down 0.18%. Newsflash: That's not a massive bull run. It simply feels like we've been in a monster uptrend in February because the gains have been minor and steady. However, any casual look at the Dow going back to 1896 shows that a 2% move is largely noise. Performance, like everything else in life, is driven by the extremes, not the mediocre.

I mentioned last Friday that our ATAC models used for managing our mutual fund and separate accounts remain defensive, primarily by being in bonds which, if you haven't noticed, haven't actually done that much in the past few weeks.

Inter-market trends have, in some cases, marginally improved, but there simply is no excitement underway within the market in a way that confirms the absolute price rise. Inter-market analysis which has led me to call many moves from the Summer Crash of 2011 to the Winter Breakout of 2013 continues to indicate that caution is warranted.

And so we are at perhaps a critical juncture. Either the Nouveaux Bulls will force stocks higher as near-term bears capitulate, or a correction ensues. While it is true that our models, run on a weekly basis, could position into equities for a quick trade, I continue to believe that a shock decline can occur.

Take a look below at the price ratio of the Utilities Select Sector SPDR ETF XLU �relative to the S&P 500 SPY . As a reminder, a rising price ratio means the numerator/XLU is outperforming (up more/down less) the denominator/SPY. For a larger chart, visit https://twitter.com/pensionpartners/status/303997247861972992/photo/1.

At the very top of the chart is the absolute price movement of the S&P 500 (SPX). The middle chart shows a weekly look of the ratio, and below it is the moving average convergence/divergence indicator (MACD) of that weekly ratio.

Utilities, like consumer staples (XLP) and Health care (XLV), tend to outperform ahead of corrections. Let me repeat that � when high-dividend, low-beta sectors lead, the odds favor a deflation pulse, coupled with higher volatility and rising correlations as money tilts toward defensiveness. Note the MACD crosses in the past three years which occurred prior to the Flash Crash of 2010, Summer Crash of 2011, and mini-corrections of 2012.

Does this absolutely guarantee that a major decline is coming? Absolutely not, but such inter-market trends simply should not be ignored. The nature of corrections is that they happen suddenly, and one only realizes it after a large part of the decline has already happened.

Behaviorally, I continue to see internal action which is not confirming bullishness. As someone who listens to price then, I must respect and continue to make the case that the environment simply is not as bullish as it looks.

Facts matter. Being defensive since late January has not resulted in a massive loss, nor any major opportunity cost. The timing of this current MACD crossing is curious given the coming sequester drama, alongside weakness in China. Regardless of the why, internal price is not behaving as it should in a true bull move. Until confirmation occurs then, I will not back down on my reasoning.

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.