The Lead-Lag Report: Correction Case Returns (Thanks, Cyprus)
Reaction by intermarket trends to Cyprus suggests that the odds of a correction are once again rising. Not all is right in the land of the Nouveaux Bulls.
Energy (NYSEARCA:XLE) – Downward
Comments: The cyclical trade continues to underperform, with energy lagging alongside other globally sensitive growth plays. I suspect a stopping point will occur around the 0.50 level, but for now the trend remains down. Leadership, however, may ultimately coincide with emerging market outperformance to come.
Industrials (NYSEARCA:XLI) – Collapse
Comments: Industrials have had a huge move in relative terms since mid-October, coinciding with strength in emerging markets and a return of risk-taking. A second attempt to break the moving average failed, with a sharp breakdown, followed by another move higher. A complete collapse has now taken place, and may be an ominous sign about global growth expectations.
Emerging Markets (NYSEARCA:EEM) – Severe Breakdown
Comments: The severe breakdown in emerging markets has been nothing short of stunning, and may be nearing capitulation relative to the S&P 500 (INDEXSP:.INX). There will be a time when emerging markets are a fat pitch for equity bulls, but the ratio needs to recover persistently first before a trade can be comfortably made.
The case for a correction appears to be back on the table following the reaction of various intermarket trends to Cyprus. More time is needed, but the risks of a declining equity environment are increasing in probability, as the deflation pulse beats from overseas. The $85 billion/month question is if the honey badger US stock market will care. My firm's ATAC (Accelerated Time and Capital) models used for managing our mutual fund and separate accounts remain defensively positioned.
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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