From Fall Melt-Up to Winter Resolution
We appear headed for a Winter Resolution whereby a true direction takes hold as we end the volatile sideways movement that US markets have been in this year.
All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.
Now that we've ended the Fall yesterday (with an enormous move up, ironically), it's time to start thinking about what comes next. I believe we likely will see an end to the volatility and overall insanity markets have expressed over the past few months much sooner than investors are anticipating.
This also means that the question of which is right, the bond market or the stock market, will get answered definitively. And so the progression goes from calling for a Summer Crash, Fall Melt-Up, to now the Winter Resolution of 2012.
Take a look below at the price ratio of the long bond as proxied by the iShares Barclays 20-Year Treasury ETF (TLT) relative to the S&P 500. As a reminder, a rising price ratio means the numerator/long bond is outperforming (up more/down less) the denominator/S&P 500.
I've taken the ratio back to 2002 and highlighted the significant periods of spikes in the outperformance of bonds to equities to show where we are relative to history. The Winter Resolution is the idea that the current levels of the Bond/Stock ratio are unsustainable, and that we likely will experience either a repeat of 2002-2003/2010 (which would result in a significant boom in equities), or something similar to 2008-2009 when Lehman failed and a credit freeze took hold globally.
The pattern has expressed itself for some time now, and likely will resolve itself much sooner than investors expect given the length of time the ratio has stayed elevated. A Winter Resolution will result in a definitive move either up or down in the above ratio.
It is unclear which way markets will go. So long as central banks are able to get ahead of a Lehman-like event, the Bond/Stock ratio likely will decline with equities rallying in the first quarter. What is more clear is that the ratio will likely chose a true direction to go in the beginning of 2012, and that the sideways bull/bear tension experienced in the US likely will end with an end to the volatile sideways action of the S&P 500 this year.
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.