The Lead-Lag Report: Beware of Credit
While not much appears to have changed in this week's report, the fact that credit spreads are starting to widen is highly concerning, and may be an ominous sign of what's to come.
Don't let the fear of striking out hold you back.
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: NO CONVICTION
Financials (NYSEARCA:XLF) – Resistance Holds
Comments: Financials have been a star performer all year, but recent outperformance is now hitting up against ratio resistance. I have highlighted concerns over the deflation pulse and behavior of the bond market which has not steepened in terms of the yield curve meaningfully. A reversal may occur, particularly should flattening in Treasuries accelerate.
Treasury Inflation Protected Securities (NYSEARCA:IPE) – Volatile
Comments: The IPE/TENZ 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. Volatility has caused the ratio to be all over the place. It remains to be seen where an actual trend forms.
Long Bonds (NYSEARCA:TENZ) – Flattening
Comments: The yield curve appears to be flattening again as the price ratio reaches for the year's highs. It is remarkable how resilient long bonds have been despite continued attempts by the Fed to force reflation back into the system.
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