With just two weeks left in 2012, it is never too late to start thinking about how the markets will likely behave at the start of 2013. By all metrics, this has been a phenomenal year for equities on a real-return basis, and it appears that Armageddon in Europe has been avoided despite the pundits arguing with 100% certainty that a Lehman repeat would occur.
It appears that many hedge funds completely missed the rally in risk, and now I see many on Twitter making the bear case for 2013 due to the fiscal cliff, overreaction on the upside and slowing growth. However, the problem I have with such statements is that they are opinions divorced from what actually matters in markets, which is crowd expectations.
"Come, gentlemen, I hope we shall drink down all unkindness."
�William Shakespeare
So what does the crowd expect entering into 2013? Will the stock market crater in the first quarter? While anything is possible, price may be signaling the exact opposite. Inter-market trends across the board still appear to suggest that conditions continue to favor risk assets.
In a central-bank-driven world where SuperBen and the League of Extraordinary Bankers continue to try to force reflation, expectations are rising for continued risk-on. I wrote about this in an upcoming Bloomberg Brief piece I put together over the weekend, in which I analyzed various ways tactical traders could determine if the environment is risk-on or risk-off across and within stocks, bonds and commodities.
One relationship I focused on in that writing which I rarely cover in my articles is gold to copper. Take a look below at the price ratio of the SPDR Gold Trust Shares ETF GLD �relative to the iPath Dow Jones-UBS Copper Subindex Total Return ETN JJC . As a reminder, a rising price ratio means the numerator/GLD is outperforming (up more/down less) the denominator/JJC. For a larger chart, visit https://twitter.com/pensionpartners/status/280683865025155072/photo/1.
Gold is generally perceived to be a safe-haven asset which has actually outperformed during deflationary pulses as opposed to inflationary environments, as recent price action shows.
Copper, on the other hand, is more of an industrial commodity which is sensitive to global growth demand.
I have included various trendlines to show that when gold is outperforming copper, and the ratio trended up, the environment was characterized by risk-off behavior. Note the ratio bottom in April 2010 before the May 6 Flash Crash, the major rally off of the February low before the Summer Crash of 2011, and the two uptrend periods of April-May and end of September to mid-November mini-correction periods.
When gold has underperformed copper (downtrend), the exact opposite occurs, as risk-on becomes the order of the day. Notice the downtrend in 2010 as the QE2-inspired rally in risk assets began, the peak and downtrend following the Oct. 3 Fall Melt-Up of 2011, the sideways action during the Summer Surprise of 2012, and the early downtrend right now. A continued breakdown here in gold relative to copper means one thing � the environment continues to favor risk assets, and for the New Year bears, it provides a stark warning: Your reasons may be right, but price is right right now.
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.
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