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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.


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.


Financials (NYSEARCA:XLF) – Support Hit

Comments: 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

Comments: 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

Comments: 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.

Twitter: @pensionpartners
No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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