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The Lead-Lag Report: Markets Hesitate


Market internals appear to be hesitating following bullish behavior post QE3. More time is needed, but for the first time in several months signs of deterioration are occurring.


Make up your mind to act decidedly and take the consequences. No good is ever done in this world by hesitation.
-- Thomas Huxley

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) – Intact

Comments: Financials strongly outperformed on the Fed's QE3 announcement of unlimited stimulus to counter stubbornly high joblessness. Targeting mortgage backed securities while at the same time not going after longer-duration Treasuries appears to be a net positive for banks as the yield curve steepens. The trend remains intact.

Small-Caps (NYSEARCA:SLY) – Rolling Over?

Comments: Small-caps are hesitating here, but I maintain leadership is more likely given very recent performance. More time is needed to confirm a reversal of trend, but should this roll over it likely means money is repositioning into emerging economies.

Treasury Inflation Protected Securities (NYSEARCA:TIP) – Spike Reverses?

Comments: The TIP/IEF 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. TIPS went utterly wild following the Fed's QE3 announcement, as inflation expectations surged. However, it appears initial enthusiasm has died down. Time is needed to see which way this now goes.


Technology (NYSEARCA:XLK) – Broken?

Comments: Despite continued hype and excitement over Apple (NASDAQ:AAPL), the technology sector still appears to be in the early stages of weakness as it rolls over relative to the S&P 500 (INDEXSP:.INX). More time is needed to confirm, but other sectors are comparatively more attractive.

Utilities (NYSEARCA:XLU) – Bounce Right on Time

Comments: Utilities are catching a bid relative to broader market averages, but it remains to be seen if this is a warning for another wave lower in equities. I suspect the downtrend will re-assert itself past this period of rallying from deeply oversold relative levels.

Bonds (NYSEARCA:IEF) – Bounce?

Comments: The bond/stock ratio has hit its support. The next few weeks are crucial to see if a reversal in trend is at hand, but I suspect a breakdown past support remains the more likely action.


Market internals seem to be reversing the bullishness expressed in the days following QE3 as hesitation takes place over what happens now. Should this be short-lived, a Fall Catalyst could take place, whereby the Dow (INDEXDJX:.DJI) makes new all-time highs in the coming months, bringing retail investors with it. The next few weeks are crucial.

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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