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The Lead-Lag Report: Stock Market Correction Coming

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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.

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Expose yourself to your deepest fear; after that, fear has no power, and the fear of freedom shrinks and vanishes. You are free.
--Jim Morrison

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.

Conclusion

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.

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.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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