The Lead-Lag Report: Emerging Rotation
While corrective risks remain in the US, the rotation in emerging markets appears to be getting started in a very real way. Could this be the early set up for the Fall Catalyst of 2012 of new all-time highs led by overseas assets?
Knowledge is power and enthusiasm pulls the switch.
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: ROTATION OVERSEAS
Financials (XLF) – Surge
Comments: While it appeared that financials strength was nearing its end, a surge has occurred as technology has dragged down on broader market averages. Repricing in of financial strength is a bullish sign despite continued near-term deterioration in other intermarket trends.
Emerging Markets (GMM) – Breakout?
Comments: Two weeks ago I wrote that, "I maintain that part of the Fall Catalyst will be a period of meaningful outperformance in BRICs (Brazil, Russia, India, China), but near-term performance is a bit concerning." A breakout appears to be underway despite US correction risks as money rotates overseas.
Industrials (XLI) – Bottoming (Again)
Comments: Industrials may finally have bottomed, outperforming as money gets comfortable in stocks like Caterpillar (NYSE:CAT) on the belief that China has bottomed, and consistent with rotation into emerging markets. Expectations-wise, it seems like the sector may be washed out and due for some leadership.
LAGGARDS: MANY MORE WEAK PERFORMERS
Consumer Discretionary (XLY) – Directionless
Comments: I maintain that weakness likely returns to discretionary stocks, given the magnitude and length of outperformance. More time is needed to see if a decline takes place.
Small-Caps (SLY) – Support?
Comments: Small-caps continue to underperform, nearing a relative support line. It remains to be seen if support can hold, but this relationship is an important one to focus on. A breakdown would be an important event which could mean the top is in for markets.
Technology (XLK) – Crash
Comments: Technology has essentially crashed relative to the S&P 500 (INDEXSP:.INX) on Apple (NASDAQ:AAPL), IBM (NYSE:IBM), and Google (NASDAQ:GOOG) earnings news hitting mega-cap companies. The trend remains down and severe weakness could persist into earnings season.
Rotation into emerging markets continue to be the most bullish part of intermarket trend analysis now, as the U.S. appears more likely to correct than overseas risk assets. The shift into emerging markets is important to pay close attention to independent of how deep U.S. equities can go in the very short-term.
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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