Click to enlarge:

Source: Pension Partners LLC


Although markets have already rallied strongly in 2012, the move is still early if current price ratio trends behave similarly to recent history.  The chart shows the price ratio of the SPDR S&P Dividend Index ETF (SDY) relative to the S&P 500 (SPY).  A rising price ratio means dividend-oriented stocks are outperforming (risk-off), while a downtrend suggests the opposite (risk-on).  Much like a pendulum that swings from fear to hope, investor sentiment goes through cycles in terms of what type of returns are preferred at any moment in time.

Notice the far right of the chart.  When we last put the post up on January 10th, the rally was just getting started, and dividend-oriented sectors such as Utilities (XLU), Healthcare (XLV), and Consumer Staples (XLP) started underperforming in a meaninful way.  The persistance in the downtrend could result in further weakness in dividend stocks and strength in more cyclical/capital appreciation sectors.  The estimated underperformance in SDY relative to SPY should the ratio return back to its support range is a bit under 5% on a spread trade basis.  Either way, the point is that a downtrend in SDY/SPY is the bull investor’s friend, and there is likely much more room to fall in terms of the movement away from income and into growth.  I discussed this idea at length in an interview I did on Bloomberg Radio last week, which can be heard

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

The contrarian trade is no longer about markets going up or down, but about the length of time the trend persists.


Michael A. Gayed, CFA is Chief Investment Strategist at Pension Partners, where he structures portfolios. Prior to this role, Michael served as a Portfolio Manager for a large international investment group, trading long/short investment ideas in an effort to capture excess returns. In 2007, he launched his own long/short hedge fund, using various trading strategies focused on taking advantage of stock market anomalies. Michael earned his B.S. from New York University, and is a CFA Charterholder

Category: Markets, Technical Analysis, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “More Room to Rally”

  1. inthewoods says:

    And how does that relationship work prior to 2009? Looks like a mess before that date to me.

  2. cpd says:

    It would be helpful to know his current portfolio % that is long stocks. Why do I get the feeling he is talking his position. Given the horrible volumes during this rally and the well known fact that many still don’t trust the stock market (for good reason), I expect there will be an increasing urgency to provide “analysis” and rhetoric to try to suck new money into the market.

  3. CANDollar says:

    David Rosenberg has a note out about coming tax hikes (courtesy Zerohedge) and how they can lead to multiple compression:

    Markets may be expecting multiple expansions for a number of reasons one of which is the modest earnings growth. But earnings growth is in deceleration revenue growth is stalled with margin expansions are the product of leaner operations.

    Many think the market is consequently undervalued. But this note explains one factor that may mean there will be a reckoning at some point and a correction. Perhaps we have a way to run (1425 anyone) until 90% of stocks are at their 200 day MA.

    Rosenberg believes the tax effects could lead to cash hoarding and a lower growth trajectory.

  4. MacroEconomist says:

    Barry, this was an inventory adjustment and one of the great F-U headfakes of all time. The problem analysts have is that their data is too US centric, the world is more globalized now and one must focus on the Chinese data. Blending the US and Chinese data, we have a period akin to May 2008. Even the MSCI World displays this technically, hovering right above its 200 day moving average.

    Take this to the banks folks, the market has topped and is going down. There is a tail risk of the S&P going past 1400+ on a decoupling move because the US data is much stronger, but so was the Chinese data in 2008. It would be fitting and suck everyone in.

    See you at SALT.

  5. DW auto says:

    Feds target transparency has made it clear that cash hoarding will lose 2% or more per year. Nikkei has been on a tear lately vs. S&P which supports argument more risk taking from Japanese investors.

  6. [...] risk on/risk off indicator worth tracking.  (Big Picture also ETF [...]