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The Lead-Lag Report: Bernanke's 'Confuse and Conquer' Strategy Is Working


The Fed's approach has caused many intermarket relationships to change. Now both bulls and bears have evidence for their arguments.

Veni, vidi, vici.
-- Julius Caesar

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.


Financials (NYSEARCA:XLF) – Topping?

Comments: Financials broke out of its sideways relative trading range and has held up well since, despite volatility creeping back into world financial markets. Residual leadership may have occurred due to continued yield curve steepening bets, which alters earnings expectations for the sector. It does seem plausible, however, that the sector could begin to lag should some credit market scare take place.

Technology (NYSEARCA:XLK) – Ugly Uptrend?

Comments: Technology has been a nasty sector to invest in given pressure from Apple Inc (NASDAQ:AAPL) and other PC/chipmakers. The decline up until recently had been nothing short of incredible in terms of the complete lack of leadership, duration, and magnitude of underperformance. This remains a good sector to watch for a potential long trade once persistent strength returns. The trend has been up, and sloppy for now.

Bonds (NYSEARCA:TENZ) – Bonds Due to Lead?

Comments: Bonds relative to stocks collapsed on better jobs data, with the real breakdown occurring on Fed QE tapering talk. The ratio has stabilized a bit here on concerns of a global correction, but more time is needed to see if a reversal in trend is about to occur. It does seem plausible that some strength in bonds is due.


Emerging Markets (NYSEARCA:GMM) – Oversold

Comments: There appeared to be a brief moment where emerging markets seemed likely to lead, but QE tapering talk combined with volatility in Japan has caused severe underperformance. We are not reaching incredibly oversold levels, with the MSCI Emerging Markets Index (NYSEARCA:EEM) underperforming by over 2500 basis points relative to the S&P 500 (INDEXSP:.INX). I maintain that a major trade is coming, but momentum needs to aggressively turn first.

Treasury Inflation Protected Securities (NYSEARCA:IPE) – Wowzers

Comments: The IPE/TENZ price ratio is one way of seeing if inflation expectations are rising or falling within the bond market. When the ratio is trending higher, it means bets are occurring on rising prices ahead. Note that the ratio has been falling, indicative not of inflation but rather deflation concerns. The trend is still down, and would need to reverse for the cyclical trade to be longer lasting.

Junk Debt (NYSEARCA:JNK) – The Last Pillar Tilts Over

Comments: The above ratio is one way of seeing if credit spreads are narrowing (uptrend in the ratio) or widening (downtrend in ratio). It is unclear if a downtrend will occur. This remains the last pillar should cyclicals not lead shortly for the bulls. More time is needed to confirm how credit spreads will behave.


The Fed's "Confuse and Conquer" strategy to talk down markets appears to be causing some significant reversals and breakdowns in various intermarket trends. It seems highly unlikely that the Fed can taper on QE given the gap between inflation expectations and central bank inflation targets, which could mean that a reversal of the reflation trade could occur following current oversold levels. For the bulls, emerging markets could save the risk rally if a bounce takes place. For the bears, the reflation disconnect is the problem.

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
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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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