The Lead-Lag Report: Status Quo Correction Risks
Intermarket relationships continue to signal the odds of a correction are currently high as status quo deterioration remains.
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: BEAR TRADE HOLDS
Financials (NYSEARCA:XLF) – Still Stalling
Comments: Financials appears to be stalling, having a hard time getting past relative resistance as the Dow (INDEXDJX:.DJI) nears all-time highs and as bond yields rise. The problem? This could be signaling the start of a risk-off period ahead, since financials tend to outperform when the yield curve steepens. If weakness kicks in, that may be a warning sign for the near-term.
Smal Caps (NYSEARCA:SLY) – Time to Lag?
Comments: Small caps have strongly outperformed since late November 2012 in a near-vertical way on the backs of increased domestic growth expectations and bets that the fiscal cliff would get resolved. Recent relative momentum appears to be waning. Underperformance could kick in during this month, which would be a sign of risk-off rotation to come.
Consumer Staples (NYSEARCA:XLP) – Aggressive Defensiveness
Comments: Consumer staples have bounced off of a support level and now appear to be leading. The strength is concerning, and is consistent with my recent series of writings about the potential for a correction to come.
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