Think of the trend in the above price ratio as a sentiment indicator. When the trend is up, it means market participants are expecting a period of volatility and are thus causing utilities (a relatively low beta/volatile sector) to outperform broader beta. [Utilities ETFs Lead in 2011]
Note the spike that occurred at the end of September, right before the rally of October began. When Italy’s news crossed, strength resumed while equities fell in another spurt up in the price ratio. However, this quickly got undone when news last week hit as global monetary authorities stepped in.
The bottom line? It does appear that markets want to continue their melt-up, and that I was wrong about the December to Remember Breakdown given the dramatic shift in policy that was expressed last week. I suspect market participants themselves will expect further response to the European crisis in what could amount to a global shock and awe program to prevent deflation fears from taking hold.
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.