Given that December since 1950 is historically the best month of the year on average for equities, it seems that investors have a growing feeling that this year will be no different. [Will Santa Claus Visit ETFs?]
Stock exchange traded funds soared Wednesday after central banks intervened to relieve pressure in funding markets — the Dow enjoyed its best day since March 2009. The liquidity action is seen as a potential game-changer for stocks.
It’s unclear whether the Federal Reserve’s move was driven by fears over a potential European bank default or not, but markets now must try to sort out if things have truly changed in terms of inflation expectations and whether the conditions favor a December rally.
I suspect markets need a bit more time to sort it out, but for now it’s worth taking a look at what the financials sector thinks given that policy action was really aimed at the banking system.
Take a look below at the price of the Financial Select Sector SPDR (NYSEArca: XLF) relative to iShares S&P 500 (NYSEArca: IVV). As a reminder, a rising price ratio means the numerator/XLF is outperforming (up more/down less) the denominator/IVV.
What was most troubling in the above chart before yesterday’s policy action was that the relationship of financials to the S&P 500 had reached a new ratio low for the year.
This despite Operation Twist, expectations for QE3, and continued rumors regarding money printing by the ECB. A bullish market should be led by financials because the entire crisis we are in is ultimately driven by too much leverage and ongoing bad debt. October looked to be a turnaround month, yet the move up was quickly countered between the beginning of November and this week.
While it is true that the longer something underperforms, the more likely it is to begin to lead, the problem here is in identifying if this is now an inflection point whereby financials lead the market higher, or continue to languish.
With many large banks at the year’s lows and looking like they are headed toward panic levels, one has to wonder if markets are in denial and may adjust downward in what I have been calling a “December to Remember Breakdown” in risk assets, or that global central banks recognized this risk and acted to try to stop the negative momentum occurring within the market.
The next few days will be key, but unless financial ETFs can begin to turnaround in a sustainable way (and soon), any kind of rally may simply be too short-lived for most to take advantage of.
The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.