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business newsThe Lead-Lag Report: Strong Economic Data Boosts Bullishness
This week's Lead-Lag Report continues to suggest favorable conditions for risk-taking, particularly thanks to stronger-than-expected economic data.
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--Winston Churchill
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.
To view the full version of the Lead-Lag Report, please click here.
LEADERS: STRONG ECONOMIC DATA BOOSTS BULLS
Industrials (XLI) – Strong ISM Supports Sector
Comments: While Industrials did not significantly outperform the stock market last week, good ISM manufacturing data is keeping investors in stocks sensitive to cyclical growth. Continued leadership is a bullish signal as an indicator of growth expectations. The ratio does appear to be headed toward its pre-Summer Crash levels.
Financials (XLF) – Reload
Comments: I have continued to stress the importance of Financials in recent Lead-Lag Reports for the bulls given that any kind of sustained outperformance would be seen as a sign that financial conditions are easing and that reflation is expected globally thanks to central banks around the world trying to avert another crisis. While it appeared that strength was abating, last week a strong move occurred as better than expected economic data increased bullish bets. Continuation in strength looks likely, and suggests markets have more room to rise.
Small-Caps (IWM) – A Stunning Move
Comments: I stated last week that 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.” The move in recent days has been particularly stunning with the ratio going nearly vertical in a hurry, undoing the Summer Crash of 2011. The trend remains intact.
Junk Debt (JNK) – Credit Spread Contraction Persists
Comments: The above ratio is one way of seeing if credit spreads are narrowing (uptrend in the ratio) or widening (downtrend in ratio). I've noted before that leadership in Financials should ideally be confirmed by leadership in Junk Debt relative to nominal Treasuries. The trend up is healthy and is happening within an environment of rising yields, which is a positive development. The Fed wants to force credit spreads to narrow and easy monetary policy increases the odds of that happening.
LAGGARDS: DEFENSIVENESS REMAINS WEAK
Consumer Staples (XLP) – No Signs of Life
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.
Long Bonds (TLT) – Economic Data Steepens Curve
Comments: Long bonds (20+ years) relative to shorter duration 7- to 10-year Treasuries weakened on better economic data in the United States. 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. Continued weakness suggests a favorable environment for risk-taking persists.
Conclusion
Trend-wise there have been no major changes from last week's Lead-Lag Report, as the environment still favors risk-taking. Better economic data is making it hard for bearish sentiment to remain, with more risk-taking potentially occurring in the near-term despite a strong start to the year for risk-assets.
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
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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