by Thomas H Kee
More interestingly, a significant outperformance has occurred recently in the Russell when compared to the Dow. In recent days money flows have been moving out of the more conservative and dividend-paying Dow, and into the Russell. At no time was that more apparent than in the last 30 minutes of trading on Wednesday. Clearly, investors have a higher appetite for risk right now, but something else exists which is important to understand. There has been a steady progression to this risk-on trade, and the conclusion raises an important question.
Progression of the risk-on trade:
4. Eventually, money looked for a home in second-tier tech names, but that lasted only for a minute because the money flow suddenly moved to the Russell. That is where it is focused today.
All the while, the ProShares UltraShort Lehman 20+ Year Treasury, or/quotes/zigman/494682/quotes/nls/tbt TBT -0.07% , the 2x short ETF based on the long-term bond, remains 7.5% below where it was at the beginning of December. If the risk-on trade was widespread through Smart Money investors as well, one would expect Treasury bonds to sell off. Interestingly, that did not happen. Instead, Treasury bonds have held firm in the face of this risk-on rotation.
Furthermore, this risk-on rotation has been on light volume, and if the late-day action from Wednesday is any indication, it may be the same money chasing different equity-based assets in search of alpha. Not in all cases, but in many, big money seems to still be interested in low-yielding and almost fruitless Treasury bonds, and that tells me this rally will not hold for long.
In addition, if the risk-on trade started with conservative plays, and it has since progressed to the highest beta and most risky class in the Russell 2000 small-cap index, the risk-on rotation may also soon come to an end. No one in the media seems to believe it, but the writing is on the wall.
AUTHOR DISCLOSURE: Short Russell and Dow
http://www.marketwatch.com/story/can-the-russell-run-up-last-2012-02-02
