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The Lead-Lag Report: Weak, Weak, Weak


This week's Lead-Lag Report continues to warn investors that a potential correction could occur in October. Weakness continues, and unless earnings cause a change in intermarket trends, caution remains warranted.


You cannot strengthen the weak by weakening the strong.
--William J. H. Boetcker

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) – Sloppy

Comments: Financials continue to try to lead, but the ratio is having a hard time reaching its mid-September level as QE3 was announced. The trend has been sloppy on the upside, but for now it remains intact.

Health Care (NYSEARCA:XLV) – Surge Continues

Comments: Leadership in health care remains a concern in the very near-term given risk sentiment, which appears to be deteriorating. The move has caused the ratio to touch June levels before the broader stock melt-up began. The problem here is that the ratio should have probably fallen further during the melt-up, making continued outperformance a troubling sign for near-term risk sentiment.

Consumer Staples (NYSEARCA:XLP) – Defensiveness Persists

Comments: Consumer staples continue their strength in sympathy with Treasuries, health care, and utilities, as money takes itself off the table following the Fed's QE3 announcement. The surge is troubling, and may be warning of a potential correction in equities for October.
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No positions in stocks mentioned.

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