Friday, July 22, 2011

Trade-Winds

Here's a glimpse of what's been on my mind over the past week or so as the mega-banks filed into earnings season. 

The more I kick around the tires, the more I feel that the financials are coming into a zone where at the very least would serve as a contrarian hedge and at best a primary trade thesis.  

As evident in the chart below - the financial sector has been trending with strengthening correlation (inverse to note/correlating to yields) with the government bond market. Over the past three months they have been in lock-step as expressed in their (weekly) correlation coefficient of .92 (a coefficient of 1.0 signifies a direct relationship). 

If you hold your nose with each subsequent round of monetary interference - you just may come to the realization that the measures taken both here (surprise, surprise- it will get done) and abroad are constructive (only on a relative basis) towards keeping the only game in town in business.  

I believe the sector is moving towards a latitude where the prevailing trade-winds (rates) will start acting again as a tail-wind.