The Lead-Lag Report: Bullish Signs Remain
This week's Lead-Lag Report shows not much has changed in terms of market sentiment toward risk-taking, although the Fed's policy change may alter that in the weeks to come.
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.
A full version of the Lead-Lag Report can be found by clicking here.
LEADERS: CONTINUATION OF STRENGTH FROM LAST WEEK
Industrials (XLI) – Caterpiller Boosts Sector
Comments: The Industrials sector got a nice boost from Caterpiller (CAT) last week which had strong earnings and kept leadership going among the company's peer group. The trend remains up, with potentially more to come as emerging markets begin their own easing cycle to reignite growth and a pickup in infrastructure-building.
Technology (XLK) – Thank You, Apple
Comments: Apple's (AAPL) blow-out earnings last week largely explain the strength in the Technology sector given that the stock makes up a little over 15% of the group. A trend in leadership may now be underway in earnest with potentially more strength to come as a result of investors re-assessing their expectations for earning growth going forward.
Small-Caps (IWM) – Stage 2 of the Bull Confirmed
Comments: Last week was an important one for beta risk-taking as a real pick-up occurred in the relative performance of small-cap to large-cap stocks. The ratio remains far away from its pre-Summer Crash levels, but a trend does seem to be in place now and is indicative of risk-taking comfort by investors looking for higher beta stocks.
LAGGARDS: SAME OL', SAME OL'
Consumer Staples (XLP) – Continuation of Weakness
Comments: A healthy bullish environment is one where defensive sectors such as Consumer Staples continue to underperform broader equity averages. The trend lower continued last week. While the potential remains for some strength to return to the sector, the ratio still has further to fall and could continue to signal further risk-taking by investors who rebalance away from the sector to higher beta stocks.
Energy (XLE) – Tough to Position In
Comments: A downtrend does appear to be asserting itself in the Energy sector, although not in as powerful a way as is occurring in Consumer Staples (XLP) and Utilities (XLU). The sector remains challenging to generate alpha from, given uncertainty over Iran and the direction of oil prices more generally. There are likely better, clearer sectors to position into for long or short trades.
Long Bonds (TLT) – Fed Causing Steepening or Flattening?
Comments: Long bonds (20+ years) relative to shorter duration 7- to 10-year Treasuries caught a bid last week following expectations that the Fed might initiate QE3 after all, given its dovish statement on Wednesday. A downtrend in the above ratio means that money is favoring shorter-duration bonds, which is bullish because it suggests inflation expectations are getting repriced into the Treasury yield curve. Should the spike in the final days of last week simply be a retest of the 20-day (one trading month) moving average and a downtrend truly emerge, the implication would be that a favorable environment for risk-taking persists.
Trend-wise there have been no major changes from last week's Lead-Lag Report, as the environment still favors risk-taking. However, markets now need to digest the Fed's announcement last week, meaning that if any real changes were to occur in sentiment, they likely would express themselves in the weeks ahead.
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.
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