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The Lead-Lag Report: Return of the Cyclicals


Market internals continue to look quite bullish, and near-term continuation of the uptrend seems more likely to continue than not, with energy looking particularly interesting.

We choose what attitudes we have right now. And it's a continuing choice.
--John C. Maxwell

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.


Financials (XLF) – Breakout & Resistance

Comments: Financials have been a star outperformer since the June 4 melt-up low of 2012, and the sector broke above past resistance as the yield curve continued to steepen on expectations of a better economic environment in 2013. Recent news that the Basel committee has loosened international liquidity requirements has also improved sentiment on the sector. The problem is that the ratio may have a hard time getting above the next level of resistance drawn in the chart.

Industrials (NYSEARCA:XLI) – Yikes

Comments: Industrials have had a huge move in relative terms since mid-October 2012, coinciding with strength in emerging markets and a return of risk-taking. Continued outperformance remains a healthy sign as it suggests money is getting more comfortable with the global growth trade despite lingering eurozone and US debt ceiling concerns.

Materials (NYSEARCA:XLB) – Breakout 2 Coming?

Comments: Materials broke through resistance toward the latter half of December 2012, and various upgrades on the sector appear to be improving marginal demand. As China goes, so go commodities, and it appears that after a prolonged period of stagnation, the sector could benefit from a return to cyclically-sensitive areas of the market. A breakout past the second resistance line could be quite bullish.
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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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