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Broker Stocks Suggest Equities Have Much More Room to Rise


The potential for further gains in equities is very real given how much more broker-dealers could outperform broader stock market averages.

Imagination is more important than knowledge.
--Albert Einstein

I like to watch the broker-dealers industry within the financials sector purely because I find it instructive to examine what market participants think about the state of financial markets going forward. Broker-dealers make their money from trading, deal flow, transactions, assets under management, etc. As such, any outperformance in the industry likely means investors in those stocks anticipate a recovery in financial markets and return of animal spirits to the crowd.

Market internals continue to favor the idea that 2012 can be a year of reflation similar to 2003 and 2009. In the vast majority of my writings I stress this because I see confirmation occurring in several areas of the investable landscape. As a matter of fact, my colleague recently put up a video update explaining our reasoning for being bullish. Broker-dealer outperformance potential confirms the environment could be much more favorable for equity risk-taking than most think.

Take a look below at the price ratio of the iShares Dow Jones Broker-Dealers ETF (IAI) relative to the S&P 500 (IVV). As a reminder, a rising price ratio means the numerator/IAI is outperforming (up more/down less) the denominator/IVV.

Weakness has been consistent since late 2009, with the price ratio getting wrecked in 2011 even before the eurozone crisis hit the airwaves. Notice the far right of the chart, where a small period of strength appears to be kicking in. I have annotated the chart to show that the potential to rally further is strong, and that the move may just be getting started. For the bulls, this means equities could continue to surprise on the upside.

Twitter: @pensionpartners
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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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