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The Lead-Lag Report: Have Major Reversals Already Arrived?


Weakness in the homebuilders and discretionary stocks could be signalling concerns about the future.

No one welcomes chaos, but why crave stability and predictability?
-- Hugh Mackay

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 the full version of the Lead-Lag Report, click here.


Financials (NYSEARCA:XLF) – Extended?

Comments: Financials led the way higher throughout the taper spasm that began mid-May as a steepening yield curve pushed money into the sector. The trend, while intact, does appear to be extended. It does seem plausible that weakness could kick in during the next few weeks on profit-taking and reallocation into more beaten down international cyclical areas of the stock market.

Emerging Markets (NYSEARCA:GMM) – Still Oversold

Comments: Emerging markets appear very much to be stabilizing after severe underperformance that took place thus far in 2013. With the spread against the S&P 500 (INDEXSP:.INX) at its largest since 1998, in the absence of an international event, I maintain that a major trade is coming. What remains unclear is if it's right here, right now.

Treasury Inflation Protected Securities (NYSEARCA:IPE) – Bounce Over?

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. Note that the ratio had been falling all year, indicative not of inflation but rather of deflation concerns. A nice bounce occurred on Bernanke reassuring markets over tapering, but the trend looks soft. More time is needed to confirm if reflation expectations are indeed about to improve further.


Consumer Discretionary (NYSEARCA:XLY) – Downtrend?

Comments: The discretionary sector has been a star outperformer in 2013, but appears now to be breaking as higher oil and gas prices sap money from the consumer. It is interesting to note that this is occurring alongside weakness in homebuilders, which is indicative of some concern over the future outlook of spending power and the wealth effect. This is an important sector to watch for domestic expectations going forward.

Small Caps (NYSEARCA:SLY) – Peak?

Comments: Small caps have performed nicely throughout the taper spasm, but now appear to have peaked relative to history given speed and level. Weakness in small-caps does not necessarily have to be a bad thing for equities overall, as it may mean rotation into multi-national large caps on bullish growth bets overseas.

Junk Debt (NYSEARCA:JNK) – New Ratio Highs

Comments: The above ratio is one way of seeing if credit spreads are narrowing (uptrend in the ratio) or widening (downtrend in ratio). Spreads have held tight in a nice way as of late, and the trend, while extended, remains up.


From an intermarket trend standpoint, the oversold nature of international cyclical plays is beneficial for beta, and may cause a rotation out of US averages, which have already done well in 2013, to more beaten down areas of the investable landscape. My firm's ATAC (Accelerated Time and Capital) models used for managing our mutual fund and separate accounts in the very near-term have rotated to emerging markets, but it remains unclear if it will hold. The potential is there, but as is always the case, when and when (when to buy, and when to sell) is all that matters.

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
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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.

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