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The Lead-Lag Report: V-Formation Failures

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Many cyclical V-formations appear to have failed recently. Is the market finally starting to worry about the deflation pulse?

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During market declines, the relative-strength method gives an early clue about future leaders in the market.
-- Michael E.S. Gayed, my father, in the second edition re-release of Intermarket Analysis and Investing

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.

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LEADERS: STUBBORN DEFENSIVENESS

Financials (NYSEARCA:XLF) – Sideways Continues



Comments: Financials have been somewhat of a boring sector as of late, making little headway in terms of both outperformance and underperformance since the start of the year. If this has simply been a pause and leadership returns, it might coincide with reflation expectations and a slowing of the deflation pulse. However, it might be worth questioning exactly why financials have not outperformed meaningfully this year despite all of this "money printing" underway through QE.

Consumer Staples (NYSEARCA:XLP) – Is Mean Reversion Over?



Comments: Consumer staples leadership has been nothing short of stunning, and the ratio hit pre-fall melt-up of 2011 levels. The mean reversion that I argued was likely in the last Lead-Lag Report seems to have taken place, but it is not yet clear if a definitive break has occurred. A bit more time is likely needed to confirm.

Utilities (NYSEARCA:XLU) – Continued Defensiveness



Comments: Much like consumer staples and health care, significant outperformance in utilities has been a part of the defensive posture within markets. The trend remains up, but signs for a reversal in the weeks ahead should be carefully watched for. Dividend sectors are rather expensive at these levels.
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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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