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The Lead-Lag Report: Market Pause or Correction Coming?


There were a number of notable flips of leaders to laggards last week, but the move looks indicative of a pause in overall market direction rather than a looming correction.

Now and then it's good to pause in our pursuit of happiness and just be happy.
--Guillaume Apollinaire

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 that 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, please click here.


Technology (XLK) – Strength Persists

Comments: Momentum traders continue to push technology stocks higher relative to the S&P 500 as the ratio remains above its 20-day (one trading month) moving average. While I believed strength would pause last week, the move higher is indeed quite powerful as more investors get comfortable with growth stocks again.

Energy (XLE) – Oil Pushes Sector Up

Comments: I noted two weeks ago that "energy's weakness may soon be ending, but more time is needed to confirm. The sector remains challenging to generate alpha from given uncertainty over Iran and the direction of oil prices more generally. There are likely better, more clear sectors to position into for long or short trades." The surge in oil prices last week pushed equity investors into the sector in what could now result in a real period of strength for the group, so long as energy prices move steadily higher as opposed to spike.

Europe, Australasia, and the Far East (EFA) – Second Greece Bailout Helps

Comments: EFA continues to show resiliency as more and more money is thrown at Europe and developed economies to combat deflationary pressures. It is interesting to note that while emerging markets fell under their 20-day relative moving average, EFA did not. Strength in international developed markets likely will result in more optimism since the financial crisis began overseas.

TIPS (TIP) – Still Trending Higher

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. When falling, deflation is the concern as nominal bonds become favored. The trend remains positive, suggesting that conditions continue to favor risk assets.


Financials (XLF) – Consolidating?

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 recent price action has put the XLF/IVV price ratio below its 20-day moving average, it has not yet done so in a convincing way. This suggests a return to leadership may soon come.

Consumer Discretionary (XLY) – In Line Despite Oil

Comments: Oil (USO) prices appear to be trying to make a dent in consumer discretionary stocks, but not yet in a meaningful way as the ratio enters a sideways pattern. The reality is that despite fears over high oil negatively impacting the consumer, the stock side does not seem to be overly concerned yet.


There were several notable flips of leaders to laggards last week, but more time is needed to see if anything has really changed underneath the market's surface. If anything, the most recent internals suggest a pause in the broader uptrend may be at hand.

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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