Broker Stocks Signal Return of Retail Investor

by Michael A. Gayed | March 15, 2012 2:12 pm

“The investor of today does not profit from yesterday’s growth.”– Warren Buffett

With the Dow Jones Industrial Average (DIA) now solidly above the 13,000 mark and more positive news coming out of Europe, I suspect it’s only a matter of time before the retail public really starts to believe that 2012 is a year of reflation similar to 2003 and 2009, as I continually stress in my writings.

Treasury-bond yields are beginning to believe this story as they rise on better economic data, improving financial conditions and repricing of inflation expectations. Even positive news on the commodity front thanks to a growth slowdown in China is making it hard to find a reason to bet against this rising stock market.

Investors love to chase past prices, meaning that rarely does money go aggressively into stocks unless prices have already risen. Volume likely increases as confidence in the markets grows, and it appears that there’s already some positioning into this idea.

Take a look below at the price ratio of the iShares Dow Jones U.S. Broker-Dealers ETF (NYSE:IAI[1]) relative to the DIA. As a reminder, a rising price ratio means the numerator/IAI is outperforming (up more/down less) the denominator/DIA.

Click to Enlarge
I’ve annotated the chart to show that there is a very real uptrend in leadership occurring in those companies most sensitive to volume, asset growth, and financial transactions. Money is betting on activity returning to the financial sector, with a lot of room for the ratio to run higher.

As the saying goes, the trend is your friend until it comes to an end. The trend for now confirms the idea that markets have much further to go in 2012.

  1. IAI:

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