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.
--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.
LEADERS: CYCLICAL CYCLICAL CYCLICAL
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.
LAGGARDS: ENERGY IS RE-ENERGIZING
Consumer Staples (NYSEARCA:XLP) – Broken
Comments: Consumer staples have badly underperformed the S&P 500 (INDEXSP:.INX) since mid-December 2012, and the trend lower appears to be in its early stages. Continued weakness is a good sign as it suggests persistent risk-taking is underway. I suspect weakness will continue until sentiment sours, potentially in February.
Energy (NYSEARCA:XLE) – Rally Coming?
Comments: Energy looks ready to rally in a catch-up trade to materials, industrials, and emerging markets. The changing supply dynamics due to fracking have held the sector back, but I suspect a move higher will soon result on increased demand expectations.
Bonds (NYSEARCA:TENZ) – Asset Rotation
Comments: The rotation out of bonds and into stocks continues, and the trend remains very favorable. Continued weakness suggests the environment favors equities independent of any kind of concerns over the coming debt ceiling fight... at least for now.
Intermarket trends remain bullish despite continued talk about fading the strong start to 2013. Deterioration appears unlikely to kick in any time soon, but various ratio resistance points need to likely get breached before another true leg higher. Our ATAC models used for managing our mutual fund and separate accounts remain positive on stocks until price says otherwise.
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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