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The Lead Lag Report: Markets Remain Hesitant


Energy and small-cap stocks come back to leadership.


You need to overcome the tug of people against you as you reach for high goals.
-- George S. Patton

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.


Consumer Discretionary (XLY) – Unreal

Comments: Discretionary stocks have continued to make new all-time ratio highs in a shocking way despite stubbornly high oil and gas prices, spiking as strong Amazon (AMZN) results pushed more money into believing the consumer can continue spending independent of what appears to be softening economic activity.

Energy (XLE) – Welcome Back

Comments: Energy collapsed in terms of leadership starting in late February, and now appears to be set to lead in the near-term. I have been addressing the possibility of another leg higher led by global growth sectors, and I suspect continued leadership in energy is indicative of money getting more bullish on emerging economies and their usage of oil.

Small-Caps (IWM) – A Tentative Leader

Comments: I noted last week that "small-caps have strongly underperformed large-caps since about February, and may be nearing the end of its downtrend as the ratio bounces off of support. More time is needed for leadership to emerge, but I suspect outperformance can begin some time next month." It does appear that leadership is back, albeit more time to get comfortable with the idea likely needs to pass to fully confirm.


Financials (XLF) – Downtrend or Not?

Comments: I have noted numerous times the importance of financials to the broader bull market and reflation theme. Financials dramatically underperformed last year and staged a period of strength since December. The ratio has recently fallen below its 20-day moving average in the first significant sign of negative sentiment creeping into risk assets so far this year. There did appear to be some continued stabilization last week. More time is needed to confirm which way financials will go next relative to the broader stock market.

Technology (XLK) – Apple (AAPL) Provides the Retest

Comments: The big pop up Apple following earnings last week drove XLK to strongly outperform the broader S&P 500 (^GSPC), but the ratio remains below its 20-day (one trading month) moving average. This suggests that the odds still favor more weakness in the technology sector to come.

Bonds (IEF) – Fixed Income Holding Tight

Comments: The ratio of bonds to stocks has rallied on global concern of a coming correction. The ratio's trend may not move higher for much longer should this correction be mini, as I expect it will be.


Not much has changed from last week's Lead-Lag Report, as the tug-of-war between the bulls and the bears continues. More time is needed to see which way the market will go, but so long as any kind of pullback is shallow (as I suspect they will be), market internals could begin to substantially improve toward the end of May.

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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