Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Have Stocks Gone Too Far Too Fast, or Not Far Enough?


The question that matters isn't whether markets have gone too far too fast, but if the conditions we're operating in are suggesting we haven't gone far enough.

"I'm not a speed reader. I am a speed understander."
--Isaac Asimov

It seems like the new mantra now after the strong start to 2012 is that the move has gone "too far too fast." I certainly can understand the feeling given the unrelenting internal strength in markets and the pervasive fear still surrounding a default of Greece. It feels like last year never happened and that volatility has returned to more "normal" levels (one of the conditions of my "Winter Resolution" idea following the Summer Crash and Fall Melt-Up). Has anything changed really in terms of the global economic landscape? Is the stock market justified at these levels?

I address this in-depth in an article coming out next month which will be published by Marc Faber of the Gloom Boom and Doom Report. I will also be addressing this tonight live on Bloomberg Rewind with Matt Miller as I co-host for the hour alongside Ed Dempsey. Let's try to answer the question of the move higher in stocks being justified from the perspective of not what actual prices are doing. Let's stop thinking in terms of a prediction for market levels. Instead, let's think about markets from the standpoint of what my colleagues and I believe matters the most – the conditions we're operating in.

The conditions under which an asset class operates in is far more important than a prediction of what that asset class will do. The most important condition that drives asset class returns? The direction of inflation expectations. When rising, it's better to be in stocks relative to bonds. When falling? Bonds are more favorable than stocks.

One way of seeing if inflation expectations are rising or falling is by looking at the price ratio of Treasury Inflation Protected Securities (TIP) relative to nominal bonds (IEF). As a reminder, a rising price ratio means the numerator/TIP is outperforming (up more/down less) the denominator/IEF.

I analyze the direction of the ratio in my weekly Lead-Lag Report (an exclusive here on Minyanville I put together every week). Notice how uptrends occur in favorable environments for the stock market, and downtrends when stocks have a hard time doing well. The trend is the key here, and the persistence of that trend. When TIP outperforms IEF, it means inflation protection is being favored over non-inflation protected bonds. Investors would cause leadership in TIP to occur when expectations for future inflation are rising. The far right of the chart shows what appears to be the very early stages of outperformance in TIP relative to IEF. The conditions are early, the trend is early, and should it persist, then the stock market S&P 500 (SPY) has only just begun its ascent. Sure we could pull back and pause, but so long as the market is sensing reflation, those very declines might be shallow and only met with more buying.

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.

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.

Featured Videos