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The Lead-Lag Report: Corrective Behavior Underway

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Intermarket trends have worsened meaningfully, suggesting that not only is a correction likely underway, but that it is very early in its move.

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If there's not drama and negativity in my life, all my songs will be really wack and boring or something.
-- Eminem

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 STRENGTHENS

Consumer Staples (NYSEARCA:XLP) – Aggressive Defensiveness



Comments: Consumer staples have bounced strongly off of a support level and have led in a vertical way since. Leadership seems likely to continue, though a period of weakness could occur for a few days given the strength of the move to begin with.

(More from Minyanville: Where Apple Is Now, and What Levels Are Worth Watching?)

Health Care (NYSEARCA:XLV) – Breakout Coming?



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 appears to be taking hold. If confirmed with other areas of the market, it would suggest weakness in overall risk markets is likely to continue.

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



Comments: The yield curve appears to be on the verge of narrowing once again, signaling the return of a deflation pulse and risk-off period. Leadership in longer-duration bonds, despite talk of an end to bond buying by the Fed, is important to get a sense of sentiment within fixed income.

LAGGARDS: BETA UNDER FIRE

Financials (NYSEARCA:XLF) – Over?



Comments: Financials may now be at the start of a turn in leadership given recent volatility in asset markets. With bond yields falling once again and the yield curve beginning to narrow as eurozone fears return, it does seem plausible that underperformance takes hold in the near-term.

(More from Minyanville: Take a Look Inside the New Goldman Sachs Catamaran.)

Small-Caps (NYSEARCA:SLY) – Broken



Comments: Small-caps have strongly outperformed since late-November in a near-vertical way on the backs of increased domestic growth expectations and bets that the fiscal cliff would get resolved. Recent relative momentum indicates a complete breakdown in leadership has taken hold. This may be due to sequestration concerns impacting the domestic economy, which small-caps are highly sensitive to.

Energy (NYSEARCA:XLE) – Failure to Launch



Comments: Energy's strength appears to be over as the cyclical trade collapsed, with the ratio unable to definitively break above resistance of 0.52. This for now remains a challenging sector to be bullish on.

Conclusion?

Internal negativity has worsened, as my firm's ATAC (Accelerated Time and Capital) models used for managing our mutual fund and separate accounts remain defensively positioned sensing the return of the deflation pulse. The concerning aspect of this is the earliness of the move, suggesting that declines are far from being over in terms of both magnitude and duration.

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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