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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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LAGGARDS: FAILED V FORMATIONS

Small-Caps (NYSEARCA:SLY) – Head Fake



Comments: Small-caps relative to large-caps have just undergone a massive head fake, forming a V formation before cracking hard again. This could be quite problematic as it indicates risk sentiment is switching somewhat violently beneath the market's surface.

Industrials (NYSEARCA:XLI) – Collapse Continues



Comments: Industrials have utterly collapsed in recent months as the deflation pulse grew stronger, and the trend remains firmly down. Poor guidance and continued concerns over overseas economic growth have caused many to underweight the sector. I would not be surprised, however, if some stabilization soon kicks in.

Treasury Inflation Protected Securities (NYSEARCA:IPE) – Now What?



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. Whether low rates cure low rates is unclear just yet, but the deflation pulse remains intact until intermarket trends say otherwise.

Conclusion

Many V-formations appear to be failing after a decent period of short-term strength in the cyclical trade. My firm's ATAC (Accelerated Time and Capital) models used for managing our mutual fund and separate accounts remain defensive given the direction of inflation expectations. More time is needed to see if a change will soon come, but the V breakdowns seem to be quite telling about underlying market sentiment.

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.

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