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The Lead-Lag Report: Health Care Diverges


There was some minor rotation last week in terms of leadership, with health care most notably diverging. Conditions continue to favor equities post Operation Twist.


Two roads diverged in a wood and I – I took the lone less traveled by, and that has made all the difference.
--Robert Frost

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 the full Lead-Lag Report, click here.


Technology (XLK) – Zzzzzzzz

Comments: Two weeks ago I stated that "I remain unconvinced though that a significant period of strength is likely to occur." The ratio has been flatlining in the past month or so. Time is needed to see which direction the trend will ultimately move

Health Care (XLV) – Bear Trade Divergence

Comments: Health care to my surprise has diverged meaningfully from other defensive areas of the market, presumably on expectations of the coming health care-reform ruling. Given that this sector is very news-dominant, I maintain that there are likely better sectors to play on the long side.

Europe, Australasia, and the Far East (EFA) – Leadership Here?

Comments: I noted before that "weakness in EFA appears to be nearing an end, though more time is needed to confirm leadership. This would be by all accounts a very bullish sign, as it suggests overseas weakness in developed economies is largely over in the near-term." An uptrend in the ratio appears to be forming, and could make for an interesting long allocation given how poorly developed markets outside the US have behaved.


Consumer Staples (XLP) – Last Gasp

Comments: Consumer staples rallied post Operation Twist like utilities, but the ratio still looks likely to trend lower. A series of lower relative highs suggests more downtrend to come.

Industrials (XLI) – Renewed Weakness

Comments: Industrials took a leg lower, and remains now in its downtrend. However, given prolonged weakness a reversal may yet come any time now.

Treasury Inflation Protected Securities (IPE) – On the Verge of Trending Higher

Comments: The IPE/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. When falling, deflation is the concern as nominal bonds become favored. Notice how sharply the ratio collapsed and hit support levels not seen since post October 3 low. A recovery may be in order, which would be a bullish sign for markets overall.


Market internals continue to point toward bullishness despite last week's Operation Twist stimulus disappointment. The conditions remain favorable for stocks and the reflation theme.

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
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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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