One of the truest tests of integrity is its blunt refusal to be compromised.
-- Chinua Achebe
Below is an assessment of the performance of some of the most important sectors and asset classes relative to each other, with an interpretation of what underlying market dynamics may be signaling about the future direction of risk-taking by investors. The below charts are all price ratios, which show the underlying trend of the numerator relative to the denominator. A rising price ratio means the numerator is outperforming (up more/down less) the denominator.
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LEADERS: BEAR TRADE RETEST
Health Care (NYSEARCA:XLV) – Unclear
: Leadership in health care appeared ready to break last week, but a mini-period of strength kicked in over the last few days. I still suspect leadership will end given the tight range the ratio is in, but more time is needed to confirm.
Consumer Staples (NYSEARCA:XLP) – Leading Again
: In a bizarre way, the consumer staples sector has continued to strengthen, breaking past ratio resistance. Optimism over dividend tax hikes not occurring may be putting a bid back into the sector, combined with uncertainty over the looming fiscal cliff. I suspect this trend is vulnerable to a reversal in the coming weeks.
Small-Caps (NYSEARCA:SLY) – Breakout?
: Small-caps have bounced around ratio support and are showing decent strength in recent days. A move to the next resistance level seems likely as money rotates into higher beta areas of the market to play an end-of-year rally. LAGGARDS: FEW AND FAR BETWEEN
Financials (NYSEARCA:XLF) – Support Hit
: Last week I stated that “despite a powerful 'risk-on' Thanksgiving week, financials did not outperform broader markets, and appear to be in the early stages of rolling over. More time is needed to confirm, but a breakdown in financials is not consistent with a healthy reflationary environment for equities.” Some minor weakness has kicked in, but the fact that the ratio is hitting against support may indicate the downtrend will not persist.
Utilities (NYSEARCA:XLU) – Retesteroo
: After severe underperformance in utilities, the sector has staged a nice relative comeback, but it remains to be seen whether a trend higher is beginning. The sell-off was extreme, so it is to be expected that a recovery in sector strength should occur.
Energy (NYSEARCA:XLE) – Rolling Over
: Energy may be on the verge of meaningful weakness as the ratio rolls over despite continued concerns over the Middle East and war with Israel. Lack of follow-through from the uptrend suggests energy is likely not a good way to trade a continued bullish move in broader assets.
A retest by defensive sectors to their respective 20 trading day moving averages may now be over, given continued improvement in credit spreads and high beta small-cap outperformance. The markets do seem to favor a continued move highs in the near-term, but a bit more time is needed to gauge the strength of conviction within markets.
Editor's note: This update is published every week exclusively for Minyanville, and is compiled by Michael A. Gayed, CFA, Chief Investment Strategist of Pension Partners, LLC.
No positions in stocks mentioned.
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