Notice how long and severe the weakness in financials has been relative to the energy sector, and how consistently energy outperformed financials since the second half of 2010 (independent of the Fed’s QE2 program and Operation Twist announced this year).
I’m a fan of simplicity, and quite frankly, the longer something underperforms for, the more likely it is to outperform. I suspect that market participants are now expecting a coming global shock and awe to the European crisis which can force inflation expectations back into the subconscious of the crowd.
This would be bullish for the highly leveraged financial system. More so than that though – if you were going to bet on financials, wouldn’t you want to do so after such a long period of bearishness by the crowd? If not now, when?
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