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.
LAGGARDS: CONSISTENT WITH A BREAKDOWN COMING
Industrials (NYSEARCA:XLI) – Sharp
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 averages has failed as a severe break took place. While it is possible a recovery move takes hold, the trend likely is lower.
Emerging Markets (NYSEARCA:EEM) – Downtrend Intact
Comments: A severe breakdown in emerging markets is underway, which indicates that all the hype over the cyclical trade at the start of the year is not being verified by price action. This remains a warning sign about global risk-sentiment, given that bets appear to be coming off for a pickup in growth.
Treasury Inflation Protected Securities (NYSEARCA:IPE) – Deflation Beats?
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 is falling. This is entirely inconsistent with a bullish environment for stocks.
I have said it before, and I will say it again: Intermarket behavior signals a correction is likely. Nothing has changed within and across asset classes as of yet to signal that new all-time highs are justified. The leading nature of relative movement and large disconnects means risk assets are much more vulnerable than the media would have you believe. My firm's ATAC (Accelerated Time and Capital) models used for managing our mutual fund and separate accounts remain cautious.
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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