Many investors are unable to understand why markets have shed last year’s volatile swings and are trending steadily higher so far in 2012.
It’s worth asking if the crowd is right to distrust the rally, or if a legitimate change has taken place underneath the market’s surface. Europe is still going through a recession and we could be headed for Lehman 2.0 still, right? The bond market remains near panic yield levels, meaning that markets have to decline as a result, correct? [Treasury ETFs on the Precipice]
The problem I have with that thinking is the automatic assumption that the bond market is always right. Yes, the bond market is generally more right than the stock market, but this does not mean it’s always right.
I say this because of the substantial improvement in the price performance of the exchange traded fund indexed to the European financial sector. It has rallied in a way not that dissimilar to U.S. banks following the March 2009 low.
Take a look at the price ratio of the iShares MSCI Europe Financial Sector (EUFN) relative to the Vanguard Europe Pacific ETF (VEA). As a reminder, a rising price ratio means the numerator/EUFN is outperforming (up more/down less) the denominator/VEA.