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Falling in Love With Stocks All Over Again


The right things are outperforming in this market, suggesting that the bull is real and that it may be time to fall back in love with stocks again.

"You can close your eyes to the things you do not want to see, but you cannot close your heart to the things you do not want to feel."
--Johnny Depp

I sent out a Buzz today on the Buzz & Banter (which I highly recommend ya'all sign up for, especially during the free trial) stating that despite declines in the S&P 500 as of writing, market internals still look pretty good and appear to be consistent with the behavior that happens in a bull market. First, consider that following the Summer Crash and Fall Melt-Up, the Winter Resolution idea I've been writing about appears to remain intact. Correlations and volatility are falling as we climb an icy wall of worry. But I am not saying that because prices are going up. I am saying that because of what is outperforming.

Take a look below at the price ratio of the Russell 2000 ETF (IWM) relative to the S&P 500 (IVV). As a reminder, a rising price ratio means the numerator/IWM is outperforming (up more/down less) the denominator/IVV.

I noted in this week's Lead-Lag Report that I considered the Small-Cap/Large-Cap price ratio to be the second stage of the bull as investors position into more aggressive and less liquid stocks. This appears to finally be happening as the ratio has now seemingly started a potential uptrend, particularly due to strength over the past few trading days. The idea of looking at a ratio of Small to Big is to see what risk sentiment internally within the markets is. After all, if investors are really bearish, they likely would not position into more economically sensitive small-cap companies and would prefer to tilt towards lower beta large-cap stocks.

Everywhere I look I see more internal confirmation that this is a bullish environment. The bond market may begin to sell off in a more meaningful way as a result. It may be time to fall back in love with stocks all over again at a time when nobody else wants to believe that maybe, just maybe, the world isn't coming to an end after all.

Twitter: @pensionpartners
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.

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