Critical Juncture: Correction, or New Highs?
Either this latest move higher sucked in new bulls right before a correction, or new highs will soon follow.
Give me a one-handed economist! All my economists say, "On the one hand...on the other."
-- Harry S. Truman
In my latest Buzz (subscription required), I alluded to the idea that markets are very much on the fence here in terms of which way to go. In late September, I began highlighting "corrective hesitation" given renewed strength in the "bear trade" following the announcement of QE3 that signaled the deflation pulse was starting to beat once again beneath the market's surface.
Markets fell the most since June last week, and have rallied in a stunning way in just the last few days. Is a breakout imminent, or is this yet another false move designed to suck in the "nouveaux bulls" who failed to participate on the upside and now have complete faith in the "Bernanke Put"?
This is quite a challenging juncture. While I maintain that the "Fall Catalyst of 2012" (new all-time highs in the Dow) is likely in the next three months, absolute price is acting as if it wants that to happen considerably sooner. And yet, full blown confirmation has not yet occurred in terms of intermarket trends.
Take a look below at the price ratio of the Consumer Staples ETF (NYSEARCA:XLP) relative to the Consumer Discretionary ETF (NYSEARCA:XLY). As a reminder, a rising price ratio means the numerator/XLP is outperforming (up more/down less) the denominator/XLY.
This is one way of gauging market sentiment. Consumer Staples (need) tends to outperform Consumer Discretionary (want) when money is concerned about a slowdown in the economy, coming volatility, or a correction. In other words, when money gets defensive, it favors "inelastic" companies that are less sensitive to the economic cycle. Conversely, when money wants to position more aggressively, it positions into those stocks more sensitive to consumer confidence and increased spending. Note that the trend in the ratio tends to coincide with market sentiment. When rising, markets have acted in defense mode. When falling, the opposite happens as risk taking increased.
Notice the move off of the mid-September level, which is around the time I started sounding the alarm on intermarket deterioration. The trend appears to be losing steam, but has not yet broken down in a way suggestive of a true risk-on period ahead (at least not yet). It is as if we are in some strange bull/bear tug of war equilibrium where there is little conviction in either direction. Our ATAC models used for managing our mutual fund and separate accounts remains defensive, but could position aggressively into equities if enough improvement occurs within the market shortly.
A bit more time is needed, but I believe we are at an important juncture. A resolution internally within the markets means the corrective period has passed and new highs become ever more likely much faster than I originally thought. However, should deterioration return, markets could conceivably fall meaningfully to adjust for that.
The next few days are critical, and my next Lead-Lag Report should help to get a sense of what happens next. [Editor's note: Here is the previous Lead-Lag Report .]
Correction or new highs? On the one hand...on the other.
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.
Daily Recap Newsletter