European Financial Sector Heading Toward A V Recovery?

“It's cool to be a part of recovery. This is just who I am, this is what I write about, what I do, and most of my work has been a reflection of what I've been going through in one way or another.” - Chester Bennington

It appears that the “mini-correction” I began making the case for in early April has now run its course, with reflation very suddenly reasserting itself as risk-taking returns. Stocks have been very resilient in the U.S., with the S&P 500 Total Return Index (IVV) still up over 6% year-to-date as of this article.

I consistently have stressed my belief that 2012 will likely be a year of reflation, similar to 2003 and 2009 which could result in a shockingly large move higher in broader equities. I believe even more this is likely given what may be a “V” formation just getting started in the relative performance of European Financials (which are at the heart of the crisis) and U.S. Financials.

Take a look below at the price ratio of the iShares MSCI Europe Financial Sector ETF (EUFN) relative to the U.S. Financials Select Sector SPDR (XLF). As a reminder, a rising price ratio means the numerator/EUFN is outperforming (up more/down less) the denominator/XLF.

In my April 29th article here on Investing.com titled “European Financials Winding Up for a Big Move”, I stated that at the time that “there does seem to be some stabilization kicking in, around the ratio low that occurred right before the January surge. Should the ratio be in a bottoming process and European Financials improve, I suspect another big move higher could occur in the sector, taking broader equities with it.”  The support line I thought would hold broke down as the May mini-correction took place following elections in Greece and France, but not in a particularly powerful way in relative terms.

Notice that a “V” formation may be underway now, with European Financials outperforming U.S. Financials potentially in a sustainable trend going forward. Given that Financials in the U.S. have themselves performed relatively well compared to U.S. markets, it seems entirely plausible to think that a period of leadership in European bank stocks would be a good sign of things to come for global risk-assets. If the potential is there and global reflation is real, European Financials might be a surprising winner for a trade.

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. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.