Investors have entered 2011 eager to embrace riskier, higher-yielding assets, but happy to dump them at the first whiff of anything negative.
It portends rocky but potentially bullish market sentiment in the coming week with a new U.S. earnings season getting underway and signs that the world's biggest economy is mending.
Positive U.S. economic news -- including an improvement in the labor market, typically seen as lagging other indicators of growth -- has generally lifted stocks over the past week, particularly on bourses in developed, trade-oriented economies.
Japan's Nikkei gained more than three percent in the first four trading days of the year, for example, compared with an annual loss of three percent last year.
Bond yields have also continued to rise, as they did for much of the fourth quarter, with prices falling as investors seek better-yielding assets.
We have entered the year where consensus expectation has shifted upwards in terms of global growth, said Tristan Hanson, strategy manager at wealth manager Ashburton in Jersey. That has manifested itself in bond yields rising.
For investors, the big issue will be whether they are correctly positioned for what could turn out to be better global growth than expected.
Take, for example, the dollar. The U.S. currency has risen more against a basket of major competitors over the past week than all but five weeks in the last two years.
This has come on the back of the better U.S. economic outlook. But a number of investors, including those in dollar-based commodities, have got used over the past few years to a rising dollar being part of the risk-aversion trade.
The rising dollar has thus been part of the fall in the Reuters Jefferies CRB index in the past week, although good economic news should normally lift most commodities.
A part of the fall may be related to concerns that new U.S. growth might mitigate the need for the Federal Reserve's liquidity-producing quantitative easing (QE) program, a move that boosted commodities sharply.
But a growing economy should nonetheless create demand for commodities.
If you see the oil price coming off a lot based on a dollar that is rising because of stronger U.S. economic growth, that would be a buying opportunity, Hanson said.
Another new factor for investors to consider is the relative underperformance of emerging markets stocks, the golden assets of 2009 and 2010.
These assets tend to outperform developed market stocks when equities rise and underperform them when they fall. Hence the MSCI emerging market index gained 74.5 percent in 2009 and 16.4 percent last year versus 26.9 percent and 9.5 percent, respectively for MSCI's developed market index.
In recent months, however, the outperformance -- or beta -- of the trade has begin to diminish, partly as a result of the huge run up in prices on emerging markets.
The past week has seen developed markets outperform emerging ones even when the daily trend was for stocks to rise.
A number of factors lie behind this, not the least being that some investors consider emerging market equities to be a crowded trade.
Some leading investors have begun leaning toward developed market companies with emerging market exposure rather than investing directly.
Emerging market investors were also rattled in the past week by Brazil introducing a reserve requirement on banks' short positions in U.S. dollars. It followed Chile's mounting of a $12 billion intervention to rein in its surging currency.
Investors will be vigilant for more of this.
Meanwhile, Tim Ash, head of emerging Europe research at RBS, reckons the cooling off toward emerging markets is related to the possibility that an improving U.S. economy will mean a reining-in of QE.
There is recognition that QE has supported risk assets over the past year, and nervousness that as liquidity is withdrawn these same assets risk a downward correction, he said in a note.
Investors will get a fresh reading on the U.S. economy from retails sales data on Friday, but those with a more bottom-up approach will get a direct test in the coming week of how an improving world economy may be playing into corporate earnings.
The quarterly results season kicks off in the United States with Alcoa, Intel and JPMorgan Chase among the first to report.
JPMorgan's results, which are expected to have improved from the third quarter as the global economic outlook has brightened, will give a taste of what may follow from other major U.S. and European banks.
Analysts are expecting a 32 percent increase in earnings growth from the U.S. season, according to Thomson Reuters Proprietary Research. That is roughly the same as the third quarter.
(Additional reporting by Nigel Stephenson; Editing by Toby Chopra)