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The Lead-Lag Report: A New Beginning for Risk?


This week's Lead-Lag Report shows not much changed as 2011 came to a close, suggesting further weakness may still be ahead.


"I don't see novels ending with any real sense of closure."
--Michael Ondaatje

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 viewed by clicking here. Below is a shortened version.


Health Care – Still Unconvinced

Comments: Despite low trading volume and what appears to be the start of a relief rally in broader beta as 2012 starts, Health Care relative to the S&P 500 closed 2011 still above its 20-day (1 trading month) moving average as defensive posturing remained in the group. 2012 will likely be an important one for the sector given the elections as investors weigh the possibility that changes occur to the Healthcare Reform Bill. This could result in the message from the sector's relative performance being muddled until voting takes place.

Utilities Holding Pattern Not Broken Yet

Comments: Utilities are one of the more important defensive sectors to pay attention to, as outperformance in the group tends to coincide very well with the direction of interest rates in the future. The reason for this relates to the sensitivity Utilities have to financing costs, and the competition for capital that likes dividends/income. The ratio closed 2011 still above its 20-day moving average. A true break in the ratio would be bullish for stocks and bearish for bonds, signaling what could be the start of a real trend higher in equities. Until it happens though, there is still skepticism.

Financials – The Key to 2012

Comments: The relative improvement in Financials is the most bullish excuse for markets to march higher should leadership finally come back to the sector in a legitimate way. The ratio appears to be in a bottoming process with some decent leadership emerging off of the late-November lows. The problem, of course, is that its hard to justify a real trend in leadership given the Europe overhang and with deflation concerns still at high levels. This remains one of the most important sectors to watch to get comfortable with taking longer-term equity risk.

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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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