Reflation Breakout And The Winter Resolution Of 2012

by: Michael A. Gayed, CFA

“I don't mind going back to daylight savings time. With inflation, the hour will be the only thing I've saved all year.” - Victor Borge

It has been a while since I've posted one of these types of articles on Seeking Alpha, but given that its a new year, I figured it's time to take a look at some of the most extreme movers in the investable landscape.

I ran a screen on my list of over 1,000 ETFs/ETNs to see which areas of the market have had the strongest upside move relative to their respective 20-day moving averages. The idea of doing this is to identify where excitement seems to be strongest at any moment in time using one trading month of data.

Click to enlarge

I find the list above to be very telling and interesting. Ignoring Sweden and international healthcare, nearly all of the remaining ETFs are highly sensitive to the “reflation trade” which is the repricing in of inflation expectations by investors. Five of the 10 most extreme ETFs above their respective 20-day moving averages are commodity related, which generally happens when investors suspect inflation will perk up. The global engineering and construction ETF likely is responding to the idea that demand could pick up and global growth could recover, consistent with why commodity sensitive investments would perform well.

Strength in regional banks is particularly important, and may be responding to both incredibly low interest rates and a potential pick-up in loan activity because of improved housing data. Larger banks remain off the list because of the overhang of Europe, but it is an encouraging sign to see more U.S. centric financial institutions start to move strongly.

Within the context of the Winter Resolution, further strength in reflation-sensitive areas would actually be quite bullish and could result in a true trend higher for equities. I noted before that I personally think another leg lower may be in the cards as not all is clear just yet internally in markets (though there has been strong improvement), but I also cannot deny that reflation prospects may be just starting to get priced in in a meaningful way.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: 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.