The Lead-Lag Report: Waiting on SuperBen
Intermarket relationships appear to be re-testing some important levels as the world waits for SuperBen and the League of Extraordinary Bankers to suit up and fight the forces of deflation.
Never talk for half a minute without pausing and giving others a chance to join in.
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.
To read the full version of the Lead-Lag Report, please click here.
LEADERS: THE PAUSE
Energy (XLE) – Can Trend Hold?
Comments: Energy is hitting up against its uptrend moving average, and is at an important juncture from the standpoint of a continuation of leadership. With tropical storm Isaac fast approaching and concerns over Oil disruptions rising, the next few weeks will be important to watch to get a sense of market movement toward the group.
Technology (XLK) – Surprise Recovery Takes Hold
Comments: Technology has outperformed the S&P 500 (^GSPC) as Apple (AAPL) momentum continues unabated. 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.
Small-Caps (IWM) – Still Early
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.
LAGGARDS: DIVIDENDSANITY CONTINUES TO WEAKEN
Utilities (XLU) – Broken
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.
Bonds (IEF) – Stocks Continue to Outperform
Comments: The ratio of bonds to stocks has broken down meaningfully since June 4, and the trend appears likely to continue given central bank action to come by SuperBen and the League of Extraordinary Bankers crowding out money from bonds.
Long Bonds (TLH) – Retest
Comments: The ratio hit the last high right before the June 4 low in equities as fear reached an extreme in the long bond/short bond ratio. The ratio has a long way to go, but appears to be re-testing its 20 day moving average on central bank uncertainty. Should the Fed enact another round of quantitative easing, rates may actually rise as money sells to the Fed, and inflation expectations continue to increase.
The market appears to be in wait-and-see mode given major policy announcements to come by the Fed and ECB. Continued underperformance in low beta/high dividend sectors remains a net positive, and could continue once more clarity comes following this week. Bullish sentiment seems more likely to continue either way.
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.
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