As we close the books on 2011 it’s now time to turn our attention to the fist quarter and what winter has in store for markets.
I believe we are on the cusp of a major turning point, and that markets will definitively trend (either up or down) in the next few months in what I am calling the Winter Resolution of 2012.
I say this because of the length of time defensive sectors have held up relative to broader market averages, which means that the incredible tension between bulls and bears can not persist for much longer.
One side will finally dominate the other.
Take a look below at the price ratio of the iShares Dow Jones Utilities (NYSEArca: IDU) relative to the iShares S&P 500 (NYSEArca: IVV). As a reminder, a rising price ratio means the numerator/IDU is outperforming (up more/down less) the denominator/IVV.
I have highlighted the prior junctures when utilities strongly outperformed the S&P 500. Each arrow in the chart is the exact same length.
For the most part, ratio tops tend to get resolved within 3-6 months, with definitive risk sentiment either turning positive (down trending) or negative (up trending) as a result.
We have gone through a substantial length of time this year where the utilities/S&P 500 ratio has stayed elevated. Realistically it can not stay at these levels for much longer given historical precedent. As such, the next three months likely will result in either a spike up in the ratio/collapse in equities or rally in equities and decline in the ratio.
What this means for investors is that likely this period of volatility will come to some kind of intermediate-term end by the end of winter. For those interested in putting money to work, every day that goes by increases the likelihood that sanity returns to markets. That would be a good thing.
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.