As I grow older, I pay less attention to what men say. I just watch what they do.
I have been highlighting in my various Lead-Lag Reports and media appearances the deflation pulse that shockingly returned post QE3 in mid-September, as my firm's ATAC models used for managing our mutual fund and separate accounts positioned out of equities. The correction has been so far fairly steady, with the Dow Jones Industrial Average
(INDEXDJX:.DJI) giving back a good chunk of the year's gains in the last six weeks. Is the corrective period over, and can the nouveaux bulls who missed the melt-up rally on the June 4 low be comfortable in stocks? Maybe, but not if Europe continues to hemorrhage.
Take a look below at the price ratio of the iShares Germany ETF
(NYSEARCA:EWG) relative to the S&P 500
(NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/EWG is outperforming (up more/down less) the denominator/SPY.
Note that big declines in the ratio preceded major declines in risk assets (Summer Crash of 2011, May mini-correction, and now). I have circled where we are to show that the ratio may be in the early stages of rolling over. This indicates that Europe is, in the here and now, more of a concern than the US, independent of the fiscal cliff drama. If the trend asserts itself on the downside, it would suggest that the corrective period may not be over just yet. My base case scenario is that this is more of a pause in the ratio and that further leadership can re-assert itself, but a meaningful breakdown in the days ahead could be an early warning signs that stocks continue to face a challenging near-term environment.
So pay attention. To be successful at markets, you have to stop listening to yourself, and start listening to price.
No positions in stocks mentioned.
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.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.