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Financials Confirm Winter Resolution Is a Bull


Financials are feeling fun again -- and the Winter Resolution looks to be a bull after all.

It's kind of fun to do the impossible.
--Walt Disney

As I have noted in numerous Buzz & Banter postings and in this week's Lead-Lag Report published exclusively for Minyanville, it appears the Winter Resolution (the idea that volatility and correlations drop and a trend asserts itself) is a bull after all.

I keep bringing up this idea that financials are the key sector to confirm the market's march higher, and for the first time in a long time there is some consistent outperformance occurring in the financials sector (yes – it's feeling fun to be in stocks again).

Take a look below at the price ratio of the Financials Select Sector SPDR ETF (XLF) relative to the S&P 500 (SPY). As a reminder, a rising price ratio means the numerator/XLF is outperforming (up more/down less) the denominator/SPY.

I have noted numerous times before that financials severely underperformed equities in 2011, even before the European crisis erupted given how long the weakness persisted for. Notice the far right of the chart, where a strong move of outperformance (up move in the ratio) is taking place.

It looks like a trend in leadership may finally be occurring. What would cause this is a sense of reflation and a repricing in of inflation expectations. That very repricing could be due to any number of factors (housing, European Central Bank, Federal Reserve, oil, etc). The reason in many ways does not matter. What matters is that the environment is favoring risk-taking again.

Continued strength in financials is crucial not only into the end of winter, but for all of 2012. Bond yields appear to be dropping substantially in Europe, and progress has been made no matter what the bears think. I can understand why individual stocks such as Bank of America (BAC) and JPMorgan (JPM) are getting attention in the media, but it is the overall sector that is showing strength now.

I believe a bet on the market here is ultimately a bet on financials leading us higher given that the sector likely has the most potential to outperform, especially if 2012 turns out to be the year of reflation as I noted in my recent CNN Radio interview. I encourage people to listen to the interview -- if anything, to provide me with feedback on the content and interview style. And, of course, for the shoutout to Minyanville.

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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