Veni, vidi, vici.
-- Julius Caesar
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: CHANGES ARE AFOOT
Financials (NYSEARCA:XLF) - Topping?
: Financials broke out of its sideways relative trading range and
has held up well since, despite volatility creeping back into world
financial markets. Residual leadership may have occurred due to
continued yield curve steepening bets, which alters earnings
expectations for the sector. It does seem plausible, however, that
the sector could begin to lag should some credit market scare take
Technology (NYSEARCA:XLK) - Ugly Uptrend?
: Technology has been a nasty sector to invest in given pressure
) and other PC/chipmakers. The decline up until recently had been
nothing short of incredible in terms of the complete lack of
leadership, duration, and magnitude of underperformance. This
remains a good sector to watch for a potential long trade once
persistent strength returns. The trend has been up, and sloppy for
Bonds (NYSEARCA:TENZ) - Bonds Due to Lead?
: Bonds relative to stocks collapsed on better jobs data, with the
real breakdown occurring on Fed QE tapering talk. The ratio has
stabilized a bit here on concerns of a global correction, but more
time is needed to see if a reversal in trend is about to occur. It
does seem plausible that some strength in bonds is due.
LAGGARDS: CYCLICALS BREAK DOWN FURTHER
Emerging Markets (NYSEARCA:GMM) - Oversold
: There appeared to be a brief moment where emerging markets seemed
likely to lead, but QE tapering talk combined with volatility in
Japan has caused severe underperformance. We are not reaching
incredibly oversold levels, with the
MSCI Emerging Markets Index
(NYSEARCA:EEM) underperforming by over 2500 basis points relative
(INDEXSP:.INX). I maintain that a major trade is coming, but
momentum needs to aggressively turn first.
Treasury Inflation Protected Securities (NYSEARCA:IPE) -
: The IPE/TENZ 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. Note that the ratio has been falling, indicative not
of inflation but rather deflation concerns. The trend is still
down, and would need to reverse for the cyclical trade to be longer
Junk Debt (NYSEARCA:JNK) - The Last Pillar Tilts
: The above ratio is one way of seeing if credit spreads are
narrowing (uptrend in the ratio) or widening (downtrend in ratio).
It is unclear if a downtrend will occur. This remains the last
pillar should cyclicals not lead shortly for the bulls. More time
is needed to confirm how credit spreads will behave.
The Fed's "Confuse and Conquer" strategy to talk down markets
appears to be causing some significant reversals and breakdowns in
various intermarket trends. It seems highly unlikely that the Fed
can taper on QE given the gap between inflation expectations and
central bank inflation targets, which could mean that a reversal of
the reflation trade could occur following current oversold levels.
For the bulls, emerging markets could save the risk rally if a
bounce takes place. For the bears, the reflation disconnect is the
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,