The Lead-Lag Report: Are Bond Markets on the Verge of a Meaningful Break?
We're at a key juncture, and the bias toward reflation remains. However, vigilance will be key in the coming weeks.
LAGGARDS: TECHNOLOGY HEMORRHAGES
Technology (NYSEARCA:XLK) – Support (Again and Again)
Comments: Technology is nearing another relative support level again after getting wrecked in the latter half of 2012. Weakness has been stunning since the late-August peak, and may be due for a period of outperformance upon confirmation. For a quick trade, technology is one to keep an eye on.
Utilities (NYSEARCA:XLU) – Breakdown Continues
Comments: Weakness in utilities continues on the heels of the fiscal cliff deal and overall risk-rotation taking place. Money continues to favor more cyclical areas of the stock market, which is a healthy sign for the continued uptrend in equities. If 2012 was the year of yield, 2013 likely becomes the year of appreciation.
Emerging Markets (NYSEARCA:EEM) – Time to Lag?
Comments: Emerging markets have performed quite strongly since September, holding up well as money favored overseas investments in the latter half of 2012. The ratio spiked to a resistance level and has since turned down a bit. A breakdown in the ratio appears to have occurred as money has rushed into overseas investments. I do not believe a big downtrend is likely, but rather that the US could simply stage a relative catch-up in strength.
Intermarket trends for the most part remain positive as our ATAC models used for managing our mutual fund and separate accounts stay in equities. The bond market appears to be at an important juncture, where either the yield curve begins to legitimately steepen, or credit spreads begin to falter after extreme narrowing. Which will take place is a function of the whims of the crowd, but the bias remains for reflation rather than another near-term deflationary scare.
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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