Is the Fall Melt-Up of 2011 Over?

By Michael A. Gayed

“Beginnings are usually scary and endings are usually sad, but it's the middle that counts. You have to remember this when you find yourself at the beginning.” --Sandra Bullock

On September 30 here on Minyanville, I wrote an article in which I argued that markets were on the verge of a very real and very powerful "risk-on" moment (see From Summer Crash to Fall Melt-Up?). In a world at the time when everyone was bearish and it seemed like 2008 all over again, I was one of the few to make an aggressive bullish call, calling for a fall melt-up and the mother of all counter-trend rallies. Of course this was not a new feeling to me, since I experienced the same kind of skepticism when I called for a summer crash back in June. That prediction came to pass in August and September, as risk assets in two months erased over a year's worth of gains.

(Check out four surprising winners in emerging markets here.)

On October 6, I wrote an article titled The Most Powerful Reason to Believe in the Fall Melt-Up of 2011 in which I noted that the relative performance of Treasuries (TLT) and the Utilities sector (XLU) against the S&P 500 ((SPY)/(IVV)) had reached ratio extremes. One of the main reasons why I had begun to argue for a fall melt-up was that the relationship of both Treasuries and Utilities to the broader markets had reached post-Lehman levels.

That means markets had behaved like an event had happened already, when in fact it had not. There was even a comment to that article claiming that the level of the ratio was meaningless. That comment did not take into consideration the question of justification -- the context under which outperformance levels occurred in the past compared to today's environment.

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So is the fall melt-up now over given that this has become the best month for equities in a number of years? To answer that let's update those two charts again, with annotations to emphasize the persistence of the trends in out/underperformance, and how that relates to risk-off/on.

'Nuff said.

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To read the rest, head on over to Minyanville.