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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.

I'm not interested in preserving the status quo; I want to overthrow it.
--Niccolo Machiavelli

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 (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.


Industrials (NYSEARCA:XLI) – Broken?

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. The move now appears to be over given the break in the 20-day moving average. If this is the start of weakness, it would be a bad sign for risk-sentiment.

Consumer Discretionary (NYSEARCA:XLY) – Rolling Over

Comments: The expiration of the payroll tax holiday appears to be weighing down on the sector, combined with higher energy costs. This remains a highly vulnerable area, sector-wise, given the extent of outperformance in the group.

Materials (NYSEARCA:XLB) – Abrupt Decline

Comments: Materials have rolled over sharply, as realization on emerging market weakness kicks in despite China growth acceleration. The sharpness of the move lends itself to a bounce, but it is concerning from the standpoint of a breakdown in commodity excitement.


No major changes have occurred within the market despite averages holding around new all time highs. Correction risks based on intermarket analysis remain high. My firm's ATAC (Accelerated Time and Capital) models used for managing our mutual fund and separate accounts are highly defensive currently. Unless a significant improvement occurs internally in the market in the coming days, caution very much remains warranted.

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.

Twitter: @pensionpartners
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.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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