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The Lead-Lag Report: Correction Case Returns (Thanks, Cyprus)

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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.

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Prophesy is a good line of business, but it is full of risks.
-- Mark Twain

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: REVERSALS

Financials (NYSEARCA:XLF) – Unclear



Comments: Financials have been under some marginal relative pressure lately as Cyprus news roils European markets and puts a bid back into bonds. It remains to be seen if a reversal is about to take place, but the direction of relative behavior is a key tell on inflation expectations going forward.

Consumer Staples (NYSEARCA:XLP) – V



Comments: Consumer staples have staged a complete relative V formation, breaking down as jobs data surprised a few weeks back, and surging following Cyprus headline risk. The trend higher now appears to be back in place, signaling risk-off pressure for markets.

Long Bonds (NYSEARCA:TENZ) – Yield Curve...Flattening...Again?



Comments: The yield curve looked to be on the verge of steepening before widening following Cyprus. It is unclear if a trend is about to start, but this remains an important relationship to watch for a potential risk-off period ahead.

LAGGARDS: CYCLICAL BREAKDOWN

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.

Conclusion

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.

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.

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