The Lead-Lag Report: Stock Market Correction Coming
The odds of a correction are rising as intermarket trends fail confirm the excitement that Nouveaux Bulls are expressing about overall markets. Risk-off is looking ever more likely.
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 RETURNS
Consumer Staples (NYSEARCA:XLP) – Defensiveness
Comments: Consumer staples have bounced off of a support level and now appears to be leading. The strength is concerning, and is consistent with my recent series of writings about the potential for a correction to come.
Utilities (NYSEARCA:XLU) – Reversal
Comments: Utilities are starting to outperform again, consistent with the bear trade of consumer staples and health care leading. This is an ominous sign, which suggests a risk-off period is ahead.
Health Care (NYSEARCA:XLV) – Sharp Comeback
Comments: Health care has V-ed in what appears to be some defensiveness kicking in within markets as the Dow (INDEXDJX:.DJI) nears all-time highs. A break above the relative resistance of 0.287, if confirmed with other areas of the market, would suggest weakness in overall risk markets is likely to come.
LAGGARDS: DOUBTS RISE
Materials (NYSEARCA:XLB) – Cyclical Trade Breaks
Comments: Materials have rolled over, as realization on emerging market weakness kicks in despite China growth acceleration. More time is needed to see if this is just a blip, but it does provide yet one more data point on the idea that weakness is occurring within the market.
Technology (NYSEARCA:XLK) – Destroyed
Comments: Technology collapsed through support and has gotten destroyed relative to the S&P 500 (INDEXSP:.INX), nearing mid-2011 levels. While a reversal could happen, the sector needs to heal and consolidate before a period of leadership returns.
Emerging Markets (NYSEARCA:EEM) – Broken
Comments: A severe breakdown in emerging markets is underway, which indicates that all the hype over the cyclical trade at the start of the year is not being verified by price action. This could be a warning sign on global risk-sentiment, given that bets appear to be coming OFF for a pickup in growth.
Across the board, intermarket trends for cyclical leaders are exhausted, and defensive trades are staging a comeback. My firm's ATAC (Accelerated Time And Capital) models used for managing our mutual fund and separate accounts remain highly defensive as of last week, as the odds of a correction rise meaningfully right at the point when the Dow nears 14,000.
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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