The Lead-Lag Report: Markets Heal
Market internals continue to suggest the mini-correction may be over. The question now becomes whether or not the reflation trade returns.
LAGGARDS: BEAR TRADE BREAKS
Health Care (NYSEARCA:XLV) – Broken
Comments: Last week I noted that “leadership in health care appears to be very extended. Much of the news may be priced in on Obama's reelection and the assumption that there will be no changes to the Affordable Care Act. Weakness may now kick in on the potential for dividend tax hikes, which could impact demand for health care stocks.” The sector does appear to be rolling over as leadership breaks.
Utilities (NYSEARCA:XLU) – Cratering
Comments: Utilities severely underperformed in the last several weeks following Obama's win as bets increased on dividend tax rate hikes to come in 2013. The breakdown has been fairly substantial, diverging from strength in bonds. A continued decline would conceivably be bullish as money moves away from dividend stocks.
Junk Debt (NYSEARCA:JNK) – Credit Spreads Sharply Narrow
Comments: The above ratio is one way of seeing if credit spreads are narrowing (uptrend in the ratio) or widening (downtrend in ratio). It appears that junk debt is trying to recover in recent days, which may be bullish. More time, however, is needed to confirm if this is just a re-test or an end to credit market deterioration.
Market internals continue to improve, suggesting that the corrective period may have indeed ended as reflationary behavior returns to markets. Key to any further gains is a breakdown in the income trade and leadership in cyclicals. Current intermarket trends suggest this could very well be starting. Next week's Lead-Lag Report will likely provide a definitive return of the bull to the market.
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.
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