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The Lead-Lag Report: Undeniably Bullish

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Regardless of whether internals are improving due to central bank policy action or not, market internals remain undeniably bullish for risk assets, as new all-time highs in stocks appear ever more likely in the coming weeks.

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MINYANVILLE ORIGINAL

Cruel leaders are replaced only to have new leaders turn cruel.
-- Che Guevara

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: THE RIGHT LEADERS FOR BULLISHNESS

Consumer Discretionary (XLY) – Wowzers



Comments: Discretionary stocks continue unabated, as hopes for additional quantitative easing from the Fed increase, and as housing itself recovers. I maintain that discretionary stocks are a tired leader given the extent of time the group has outperformed.

Financials (XLF) – Still Early



Comments: Financials continue to fight back, which makes sense on a return to reflation. Potential QE3 coming from the Fed means banks recover as yield curves steepen and inflation expectations return. This remains a very important sector to pay attention to in the coming days. The move is early, and very bullish from a sentiment standpoint.



Small-Caps (IWM) – Mirroring Fall Melt-Up of 2011



Comments: Small-caps are now showing behavior similar to what happened during the Fall Melt-Up of last year. A repeat may very well occur given weakness in the bear trade and a recovery in risk-taking underneath the market's surface, particularly on Fed action to come.

LAGGARDS: TECHNOLOGY MOST VULNERABLE

Technology (XLK) – Leadership Broken



Comments: Last week I noted that "the sector ETF is now nearing an important relative resistance level, which could serve as a stopping point for continued leadership given how well the group has performed thus far in 2012." It appears that a meaningful break is underway, as money rotates into other sectors.



Utilities (XLU) – Unrelenting Continuation



Comments: Utilities continue to break down, and appear to still have further to fall. This remains a positive sign for markets given the role utilities has as a "place to hide" in equities when volatility is rising and recession fears increase. The underperformance has been unrelenting.

Emerging Markets (VWO) – China Catalyst?



Comments: It appears third time may be the charm for emerging markets as a third bottom may now be in place. The group has has a hard time leading, but a spurt of strength driven by China stimulus hopes may be just the catalyst needed for sustained leadership. I maintain that the next major rotation likely in the fourth quarter is in emerging economies.

Conclusion

Intermarket trends remain favorable for equities, and the cyclical trade remains the most important to watch. The next rotation likely is in emerging markets, financials, and anything most sensitive to rising inflation expectations, which appear to be forced upon us by SuperBen and the League of Extraordinary Bankers.

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.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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