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The Lead-Lag Report: Nouveaux Bulls Vs. Gray-Haired Bears


Nothing has changed. Dow new highs be damned -- market internals continue to favor a correction. I will not back down on the case until intermarket trends say risks have faded.

The more things change, the more they stay the same.
-- Alphonse Karr

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.


Consumer Staples (NYSEARCA:XLP) – Aggressive Defensiveness Continues

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. Either way, leadership is not consistent with a bullish environment for stocks.

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

Comments: The yield curve appears to be narrowing, 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. A flattening yield curve is inconsistent with a bullish environment for stocks.

Bonds (NYSEARCA:TENZ) – The Test

Comments: Bonds still appear to be in the early stages of outperforming stocks, and I suspect further relative strength could occur with a meaningful stock market correction. More time is needed to confirm, but the potential does exist for a powerful relative move to come.
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No positions in stocks mentioned.

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