The Lead-Lag Report: Market Tug of War
Consumer staples strengthen along with health care and small-caps. Laggards include financial and utilities.
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.
For a full version of the Lead-Lag Report, click here.
LEADERS: BEAR TRADE RETEST
Health Care (NYSEARCA:XLV) – Unclear
Comments: 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
Comments: 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?
Comments: 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.
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