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The Lead-Lag Report: Bonds Leading, Emerging Market Stocks Outperforming


Two big trades on a rotational basis are forming. For equities, it is emerging markets; for bonds, it is long duration.

Dark economic clouds are dissipating into an emerging blue sky of opportunity.
--Rick Perry

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.


Materials (NYSEARCA:XLB) – Continuation

Comments: Materials have staged a nice comeback since August, in line with strength in emerging markets and a rotation to global cyclical trades. The trend for now remains higher, and a re-acceleration in China could provide more fuel for alpha momentum in the weeks ahead.

Energy (NYSEARCA:XLE) – Leading

Comments: Energy has been showing some signs of strength recently and appears to be an early leader, consistent with materials outperforming and emerging market stocks getting a bid. This appears to be an early move thus far as oil hovers around its current level.

Emerging Markets (NYSEARCA:GMM) – Early and Confirmed

Comments: Emerging markets appear very much to be stabilizing after severe underperformance that has taken place thus far in 2013. Now outperformance does appear to be legitimately underway, with significant alpha potential into the end of the year. This appears to be where money is positioning for the fourth quarter.


Utilities (NYSEARCA:XLU) – Reversal Coming?

Comments: Utilities were badly hit as yields rose due to Fed tapering talk, reaching extremely oversold levels. The trade has gone sideways in recent weeks as bond yields have stabilized. Should we re-enter a true risk-off period whereby money seeks safety in dividend plays, the ratio could move higher.

Consumer Staples (NYSEARCA:XLP) – Bottom Coming?

Comments: The peak in consumer staples occurred just before the taper spasm broke down the yield play. Since then, the ratio has fallen as money shunned the income trade. While the trend remains lower, one should be on the lookout for a reversal to come as earnings come in and potentially disappoint equity bulls.

Bonds (NYSEARCA:TENZ) – Bonds Getting Love

Comments: With the Fed not tapering and an extended US stock market, leadership in bonds relative to US stocks appears to be kicking in after severe underperformance all year. US stocks and US bonds have priced in reflation which does not exist. This implies that the ratio should be at a higher level than where it is now.


US markets look increasingly vulnerable as bonds lead and defensive sectors appear on the verge of bottoming. Against that backdrop are emerging market stocks, which have been outperforming nicely since September. If you need to be an equity investor, emerging markets offer good potential. If you have the ability to be flexible, bonds offer opportunity for a re-allocation into defensiveness.

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.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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