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.
LAGGARDS: BEWARE OF CREDIT
Utilities (NYSEARCA:XLU) – Collapse
Comments: Utilities severely weakened in the last several trading days 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.
Technology (NYSEARCA:XLK) – Continued Collapse
Comments: Technology has continued its collapse relative to the S&P 500 (INDEXSP:.INX), completely undoing all of the year's outperformance over a month-long period. A rebound may yet come, but the trend still remains down.
Junk Debt (NYSEARCA:JNK) – Credit Spreads Start Widening
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 ready to begin a real trend of underperformance, consistent with a risk-off period as credit spreads widen as a result.
Many intermarket trends appear to be in the same place as they were prior to two weeks ago, but the most notable difference is in credit spreads which appear to be on the verge of meaningful widening. If the weakness in junk debt is early and just getting started, then the risks of a more serious correction likely rise independent of the Bear Paradox idea regarding the attractiveness of stocks as an income alternative to bonds.
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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