Welcome to the Real Bull Market

“The real voyage of discovery consists not in seeking new landscapes, but in having new eyes.” – Marcel Proust

There is a behavioral tendency for human beings to oversimply.  “How is the market doing?”  “Well the Dow is up 100 points! The S&P 500 is up a percent!”  “It’s a bull market!”

Oversimplified.  The “market” is not only made up of 30 stocks as represented in the Dow Jones Industrial Average.  Nor is it just 500 stocks in the S&P 500.  Because of home bias and the availability heuristic, many tend to only look at headline averages to make the case that stocks are doing well, rather than looking at the true market which is quite literally anything and everything globally which can be invested in.

To that end, we need to think more deeply about how the true market has fared in what visibly has looked like an incredible bull market.  One of the most underappreciated aspects of the cycle that has dominated over the last few years has been that all the wrong stuff has pushed markets higher.  In real bull markets, would you expect food, medicine, and electricity to lead equities on the upside?  Probably not, because Consumer Staples, Healthcare, and Utilities are among the least sensitive sectors of the stock market to growth and inflation.  History argues that behaviorally, cyclical sectors, high beta, small-caps, and emerging markets have tended to be the way to be really bullish.  This is consistent with all the research we’ve put out there in our award winning papers (click here to download).

Yet, oversimplification about the strength of the bull market has failed to take into account what has driven equities in the US (and largely in the US alone) to push forward.  It is precisely for this reason that active managers and global asset allocators have not fared that well in the last few years.  Not only was the world dominated by mega-caps in the US, but within that the sectors which are usually more defensive became the way to capture upside.

This may be about to change.  Below is the price ratio of the PowerShares S&P 500 High Beta Portfolio (SPHB) relative to the Powershares S&P 500 Low Volatility Portfolio (SPLV).  A rising ratio means high beta (riskier) stocks are on average outperforming low volatility (less risky) stocks. The top shows the relative strength of that ratio, and beneath the middle pane is the performance of the two Exchange Traded Funds since a significant “bull” market began in October 2011.  High beta, which should have led the last few years, ended up underperforming low volatility by a whopping 3,380 basis points.


Notice that the ratio is now making higher lows?  Should this continue, it would suggest high beta stocks on average are beginning to go up more/down less than low volatility positions.  This is precisely the kind of behavior one wants to see in a bull market.  And if I may allow myself to oversimplify, that means a real bull market driven by all the right stuff may be finally here.

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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