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The Lead-Lag Report: Still No Bullish Signs and a Challenge for Equities Near-Term


It's a big concern that market internals were unable to show any real improvement following last week's equity bounce from oversold levels.


We must let go of the life we have planned, so as to accept the one that is waiting for us.
--Joseph Campbell

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 that 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.

To see the full version of the Lead-Lag Report, click here.


Health Care (XLV) – Still Around Resistance

Comments: Health care's outperformance continues to hold in despite being turned away from ratio resistance. The next few weeks will be important to see if a breakout above occurs. Continued strength in the health care sector remains a negative sign as it suggests investors continue to believe markets could deteriorate more broadly.

Consumer Discretionary (XLY) – False Reversal?

Comments: The discretionary sector bounced back after what appeared to be the beginning stages of weakness. I remain unconvinced that outperformance will continue given how well the sector has done over the past three years, but more time is needed to confirm either way.

Bonds (IEF) – Fixed Income Strength Continuing?

Comments: Bonds have significantly outperformed stocks since the March ratio low, particularly post European elections. Now, the ratio is hitting resistance. Should another surge in the ratio occur, it likely means the correction continues in risk assets. It is worth noting that bonds continued to do well despite stocks bouncing from oversold levels last week.


Technology (XLK) – Downtrend Re-Emerges

Comments: I noted last week that "I remain unconvinced however that a new trend of strength is about to occur. More time is needed to confirm." Last week the ratio did break down a bit more, and may be on the verge of a more meaningful period of weakness to come.

Materials (XLB) – Coming V or False Move?

Comments: Materials bounced strongly from oversold levels, and may be on the verge of leadership should the ratio break through its moving average. This would be a bullish sign for markets as it might means bets on global growth are returning.

Emerging Markets (VWO) – China Weighs Down

Comments: Emerging markets have continued to significantly underperform, with recent weakness in China really weighing down on shares. Given that most emerging markets are still export driven, as goes Europe, so goes emerging markets. The US stock market remains the key area to hide in if you're an equity investor on the global stage.


Markets remain at a critical juncture. Various intermarket relationships are still signaling the corrective period is not over, with credit spreads remaining the most worrisome aspect of market internals. With Spain's 10-year yield at panic levels, it appears markets are hostage to developments overseas. The next few weeks should provide market participants with a clearer answer.

Twitter: @pensionpartners
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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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