The Lead-Lag Report: Bear Trade Fades
Intermarket trends continue to improve as the bear trade fades and the bull trend gets back to being everyone's friend.
We gain strength, and courage, and confidence by each experience in which we really stop to look fear in the face...we must do that which we think we cannot.
-- Eleanor Roosevelt.
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: EMERGING MARKETS RETURN
Materials (XLB) – Bullishness Increases
Comments: Materials bounced strongly from oversold levels, and may be on the verge of meaningful leadership, which would be a bullish sign for global growth and reflation. More time is needed to be fully comfortable, but this is a strong sign of what may yet be a significant move higher in equity markets.
Emerging Markets (VWO) – Leadership Returns
Comments: After severe underperformance since March, emerging markets look to be at the early stages of new leadership. This would be a very bullish sign as it suggest bets are returning on global growth. Brazil and China have lowered rates and monetary policy may now cause a move higher in equities.
Bonds (IEF) – The Fall Before the Downtrend?
Comments: Last week, I wrote that "bonds have spiked relative to the S&P 500 in recent days, as fear continues to grip markets. While the trend remains positive, the move is reminiscent of late November, after which the trend resumed lower in the ratio relationship. A similar set up may be occurring now." The ratio did break down last week on the strong move higher in equities, and may be on the verge of a down trend. This would be a bullish sign for equities as scared money in bonds gets scared that it's wrong.
LAGGARDS: THE TRANSITION BEGINS
Health Care (XLV) – Weakness Emerges
Comments: I noted last week that "health care is holding around its ratio resistance, but seems to be having a hard time breaking through. While the trend is still technically up, a potential reversal may be nearing, which would be a bullish sign for markets." It appears that a reversal is at hand as a period of weakness may be emerging. This is a bullish sign for broader equities.
Financials (XLF) – Turning Around?
Comments: I have noted numerous times the importance of financials to the broader bull market and reflation theme. Financials dramatically underperformed last year, and staged a period of strength since December. The ratio is now bouncing off of early January levels. This remains an important sector to pay attention to as a gauge of investor sentiment on the financial crisis.
Treasury Inflation Protected Securities (IPE) – Waiting for the Light to Change
Comments: The IPE/IEF price ratio is one way of seeing if inflation expectations are rising or falling within the bond market. When the ratio is trending higher, it means bets are occurring on rising prices ahead. When falling, deflation is the concern as nominal bonds become favored. Notice how sharply the ratio collapsed and hit support levels not seen since the post October 3 low. A recovery may be in order, which would be a bullish sign for markets overall.
Conclusion? The bear trade continues to weaken as the bull trade recovers and risk sentiment improves and as global growth bets seem to be returning. More time is needed to confirm, but the trend back to a more sustained period of "risk-on" is gaining strength.
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.
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.
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