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The Lead-Lag Report: Conditions Get Challenging

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Market internals have weakened in the past couple of weeks, but the path is still higher as favorable conditions remain internally within markets.

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MINYANVILLE ORIGINAL

Although our intellect always longs for clarity and certainty, our nature often finds uncertainty fascinating.
-- Karl Von Clausewitz

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 larger version of the Lead-Lag Report, click here.

LEADERS: DEFENSIVENESS CATCHES A BID

Consumer Staples (XLP) – Surprising Strength



Comments: Two weeks ago I noted that "consumer staples rallied post Operation Twist like utilities, but the ratio still looks likely to trend lower. A series of lower relative highs suggests more downtrend to come." The comeback in the staples sector has been significant, and sends the ratio back to resistance levels. A breakout above this would be a negative sign for markets overall.

Health Care (XLV) – Volatile Leadership



Comments: Health care has been a volatile leader, particularly post-Supreme Court decision. The ratio is slightly above resistance, and may have further to run. However, the extent of outperformance makes this a tricky trade for the longs.

Energy (XLE) – V?



Comments: Energy appears to be in the early stages of a V-like formation as oil itself rebounds. It is worth noting that this is happening despite global growth slowdown concerns. Given the extent of underperformance, a recovery is likely in order.

LAGGARDS: CYCLICAL CAPITULATION?

Technology (XLK) – Bearish Sentiment Reasserts Itself



Comments: Weakness in technology appears to be in its early stages which I have noted in prior Lead-Lag Reports was a likely scenario. Dour sentiment on semiconductor stocks and disappointing guidance means the sector could continue to drag lower in terms of underperformance.

Consumer Discretionary (XLY) – Downtrend Intact



Comments: Discretionary stocks weakened significantly since late May. Low oil prices are not stoking demand in the group, which has been a strong performer since 2008. Betting against discretionary is likely a high-probability trade in terms of lagging other areas of the market.

Industrials (XLI) – Hard Breakdown



Comments: Industrials cratered in the last couple of weeks as concerns have grown over China's slowdown and the recent weak PMI data that has come from multiple countries. The ratio remains near support, and the next few weeks will be important to watch.

Conclusion

Market internals appear considerably more tempered than they were in early June, suggesting a rocky road may be ahead of us until price is able to decide which way to move. There are enough positive signs though to suggest that the path most likely remains higher.

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.

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