I'm looking for the unexpected. I'm looking for things I've
never seen before.
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.
For a full version of the Lead-Lag Report, click
LEADERS: DIFFERENT KIND OF GREAT ROTATION
Consumer Discretionary (NYSEARCA:XLY) - Failure?
: The discretionary sector has been a star outperformer in 2013,
but appears now to be breaking as higher oil and gas prices sap
money from the consumer. It is interesting to note that this is
occurring alongside weakness in homebuilders, indicative of some
concern over the future outlook of spending power and the wealth
effect. This is an important sector to watch for domestic
expectations going forward.
Industrials (NYSEARCA:XLI) - Global Trade
: Industrials have held a rough uptrend since mid-May, with quite a
bit of volatility as of late on lingering concerns over China's
growth rate. Recent strength seems to be driven by renewed interest
in the global growth/reflation trade, with China leading the charge
and commodities bouncing back.
Materials (NYSEARCA:XLB) - Boom
: Materials, like energy, have had a hard time outperforming this
year, but recent behavior has been very powerful. A breakout move
may be here, coinciding with strength in overseas commodity plays
and anything sensitive to an increased pace of growth for China.
Financials (NYSEARCA:XLF) - Not Good
: Financials tend to outperform when the yield curve steepens as
bets increase on lending and economic activity. After a strong
period of outperformance, weakness has kicked in
the yield curve still steepening. This kind of divergence may be a
warning sign of coming US weakness.
Consumer Staples (NYSEARCA:XLP) - Stabilizing
: The peak in consumer staples occurred just before the taper spasm
broke down the yield play. Some stabilization does appear to be
taking place on bets that the Fed may not aggressively pull back
stimulus any time soon. A continuation of the bull market likely
coincides with a further drop from these ratio levels, and
leadership in more beaten down sectors of the market.
Long Bonds (NYSEARCA:TENZ) - Yield Curve Support?
: The yield curve has steepened as the market reprices potential QE
tapering, and has bounced off of a support level as of late. Some
leadership in longer duration bonds does seem plausible, especially
given weakness expressing itself in financials, homebuilders, and
consumer discretionary stocks, independent of tapering.
Emerging cyclical trades are showing signs of meaningful strength
as cracks emerge in US equities. An unexpected correction of
falling US stocks coupled with rising international equities may be
in the cards, just in time for "Sep-taper."
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.