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The Lead-Lag Report: Correction...Starts?


Intermarket trends suggest that a correction may be underway just as the Dow hovers around 14,000. Relative behavior is simply not confirming absolute price excitement.

Distrust and caution are the parents of security.
--Benjamin Franklin

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) – Still Stalling

Comments: Financials appears to be stalling, having a hard time getting past relative resistance as the Dow (INDEXDJX:.DJI) nears all-time highs and as bond yields rise. The problem? This could be signaling the start of a risk-off period ahead, since financials tend to outperform when the yield curve steepens. If weakness kicks in, that may be a warning sign for the near-term.

Industrials (NYSEARCA:XLI) – Time to Break?

Comments: Industrials have had a huge move in relative terms since mid-October, coinciding with strength in emerging markets and a return of risk-taking. The move now looks extended, echoing 2010 in terms of magnitude and duration. If this is the start of weakness, it would be a bad sign for risk-sentiment.

Small-Caps (NYSEARCA:SLY) – Rolling Over

Comments: Small-caps have strongly outperformed since late-November in a near-vertical way on the backs of increased domestic growth expectations and bets that the fiscal cliff would get resolved. Recent relative momentum appears to be waning. Underperformance could kick in during this month, which would be a sign of risk-off rotation to come.
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No positions in stocks mentioned.

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