In the case of a downtrend, the price reaches an oversold
position and it remains there for an extended period of time, until
the decline runs its course.
--Michael E.S. Gayed, my father, in the second edition re-release
Intermarket Analysis and Investing
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: CYCLICALS RALLY FROM OVERSOLD
) - Sharp Move
: Last week I noted that "like small-caps, energy nicely rallied in
recent days, but appears to be getting turned away after hitting
its 20-day moving average. More time is needed to confirm, but the
trend in weakness could very easily reassert itself should the
deflation pulse continue to beat." A break in the downtrend appears
to be happening, consistent with a rotation to cyclicals.
) - W
: A complete reversal and W formation has taken place in
industrials, breaking the downtrend as the market suddenly reprices
out the deflation pulse. This is consistent with various other
intermarket trends in terms of the rotation into cyclicals which
appears to very much be underway.
) - V Holds
: Materials have V'ed in a way consistent with the idea that the
cyclical trade was oversold. Given the extent of weakness, the
ratio could rally back to the year's highs, coinciding with
emerging market strength and continued yield curve steepening which
may lie ahead.
LAGGARDS: DEFENSIVES BREAK FROM OVERBOUGHT
Consumer Staples (
) - Is Mean Reversion Over?
: Consumer staples leadership has been nothing short of stunning,
as the ratio hit pre-fall melt-up of 2011 levels. The mean
reversion I argued was likely in prior Lead-Lag Reports seems to be
unclear, with a complete breakdown reminiscent of the fall melt-up
of 2011. This indicates that a sharp re-pricing of the deflation
trade is occurring.
Health Care (
) - Pop?
: Health care had gone vertical in terms of dramatic outperformance
this year, reminiscent of early 2011 prior to the summer crash. The
trend appears to have broken over the past few days with a sharp
sell-off underway relative to the
(INDEXSP:.INX). This might indicate that a bursting of the "ratio
bubble" I alluded to in prior Lead-Lag Reports may be underway.
Utilities (XLU) - Severe Break in Trend
: Much like consumer staples and health care, significant
outperformance in utilities has been a part of the defensive
posture within markets up until last week, when a very severe break
in trend took place. This furthers the argument that an aggressive
repricing of the deflation trade is underway.
A significant repricing appears to be underway with money favoring
cyclical trades which have lagged throughout the deflation pulse,
and defensives which have illogically driven markets higher. It
remains to be seen if this is a simple trade as opposed to a longer
theme. My firm's ATAC (Accelerated Time and Capital) models used
for managing our mutual fund and separate accounts rotated into
stocks last Friday to play oversold cyclicals, but remain ready to
position out should disconnects not fully be resolved.
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.