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.
-- 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.
LEADERS: NOTHING IS CONSISTENT WITH NEW HIGHS
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.
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.
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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