The Lead-Lag Report: Cyclical Rotation Begins

“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 2nd edition re-release of “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.


Technology (XLK) – The Never-Ending Rally

Image of Technology select sector SPDR fund

Comments: Technology has been leading this bull market for much of its duration but its run in 2019 has been nothing short of remarkable. Perhaps more impressive has been the depth of the rally. It’s getting contributions from virtually all segments of the sector – robotics, software, semiconductors, networking and cloud stocks. Tech remains in control here and shows no signs of letting up.

Materials (XLB) – Another Head Fake or Real Rebound?

Materials select sector SPDR fund graph

Comments: Since bottoming relative to the S&P 500 back in October, materials have zig-zagged all throughout 2019. The sector has tacked on more than 6% over the past two weeks led by a surge in the metals and mining group but the rally could be short-lived. The group is expected to report -12% year-over-year earnings, the second worst forecast ahead of only the energy sector.

Consumer Discretionary (XLY) – Ready for Liftoff

Consumer discretionary select sector SPDR funds image

Comments: The discretionary sector ratio hit new highs on the heels of a slew of encouraging economic data. Consumer confidence, employment, and wage growth data all point to an economy that is still healthy and chugging ahead which should be a tailwind for the group. One factor to watch could be oil prices. It remains to be seen if rising prices at the pump will negatively impact consumer spending.

Industrials (XLI) – Inconsistent but Hanging Tough

Industrial select sector SPDR funds image

Comments: The industrial sector has ticked downward in April. Investors rotated back into cyclicals and growth stocks following better than expected economic data. Industrial production and manufacturing data in Q1 look solid if not strong but the direction of the group going forward will be largely dependent on the health of the economy going forward.

Small-Caps (SLY) – Benefiting from Risk-On

Image of SPDR S&P 500 small cap

Comments: Small-caps have taken advantage of the risk-on sentiment over the past few weeks. Small business confidence is at a historically strong level and a strong job market could continue to push small-caps higher in the weeks ahead despite giving back all of their relative outperformance from earlier in the year.

Long Bonds (TLH) – The Uptrend is Intact

Image of 10 to 20 year treasury bond ETF

Comments: The Fed pivot drove the 10-year Treasury yield back below the key 2.5% level as investors continue to brace for a possible recession. The ratio took a hit this past week as the jobs report and China data led traders back to equities, but the longer-term trend remains positive. Breaking through the current two-year resistance ceiling could be a key to further gains.

Junk Debt (JNK) – Riding the Cyclical Wave

Image of SPDR Barclays high yield bond ETF

Comments: Junk debt spreads have narrowed considerably in 2019 making high yield bonds the top performing fixed income group. The uptrend has narrowed lately versus Treasuries. Junk continues to perform comparatively well relative to the investment-grade corporate bond market. Continued healthy economic data should keep this group in favor.


Financials (XLF) – Weakened by the Fed

Financial select sector SPDR funds image

Comments: A healthy economic outlook generally shows itself in a healthy financial sector but so far we’re not seeing it. As long as rates remain lower for longer, banks will struggle to lend profitability and the group will remain under pressure. Commercial loan activity has grown over the past year which could be a reason for optimism.

Health Care (XLV) – The Remarkable Slide Accelerates

Health care select sector SPDR funds image

Comments: The healthcare group ratio has turned into a big upside down V. The turnaround coincides with the 2018 general election where Democratics took control of the House and uncertainty over topics such as “Medicare For All” began to dominate the rhetoric. Companies are still highly profitable and the sector is expected to deliver one of the better Q1 earnings seasons but sentiment remains highly negative.

Utilities (XLU) – A Rapid Trend Reversal

Utilities select sector SPDR funds image

Comments: On a weekly basis, utilities have usually been near the top or bottom of the weekly sector performance charts. Like other defensive groups, utilities have lagged on the heels of better than expected economic data. Traders have abandoned some of their defensive positionings in the biggest trend reversal of the year so far for this ratio. Positive developments in China trade could keep this intact.

Energy (XLE) – Not Benefiting From Crude Rally Yet

Energy select sector SPDR funds image

Comments: The rise in oil prices has at least kept the energy sector on pace with the broader market lately but the overall trend remains down. This ratio hasn’t been above the 20-day moving average consistently in almost nine months and could use a boost above that level to spark a rally. The 30%+ rally in crude oil prices could help “fuel” a move.

Consumer Staples (XLP) – Lost Momentum

Consumer staples select sector SPDR funds image

Comments: Like utilities, the consumer staples group has underperformed due to the rotation into higher beta equities. This sector may be poised to do better once the economy actually begins turning, but steady GDP growth, low inflation and a healthy jobs market will likely prevent it from a sustained move above the S&P 500 in the short-term.

Emerging Markets (IEMG) – Stabilizing in an Unstable Environment

Image of iShares Core MSCI Emerging Markets ETF

Comments: The global economic slowdown in areas like China and Europe have dragged down international equities in general but it hasn’t affected all areas equally. Emerging markets have kept pace with U.S. equities over the past couple months and have outperformed developed market equities. It’s too early to suggest a potential change in leadership. Compelling valuations along with pockets of growth could make the group attractive.

Europe, Australasia, and the Far East (IEFA) – Drag from Europe

Image of iShares Core MSCI EAFE ETF

Comments: After a promising spike in December, developed markets have slowly and consistently lagged. Weakness in Europe and uncertainty over Brexit have kept investors at bay with no immediate reprieve in sight. Several areas like Germany and Italy are already near recessionary territory and investors appear hesitant to go risk-on here.

Bonds (TLH) – Popular but No Rotation Yet

10-20 year treasury bond ETF image

Comments: The bond ratio continues to move lower as the S&P 500 pushes back towards all-time highs but the fixed income group hasn’t been a poor performer. Long-term corporates are up 7% year-to-date and Treasuries have benefited from progressively lower yields. A full-blown rotation from stocks into bonds doesn’t appear to be in the cards in the short-term.

Treasury Inflation Protected Securities (IPE) – No Inflation Ahead

SPDR Barclays TIPS ETF image

Comments: Inflation hasn’t been a big concern lately (the inflation rate came in at 1.5% in March although the core rate was 2.1%) so TIPS haven’t been in huge demand. As the Fed prepares for rate cuts instead of hikes and the yield curve suggests that investors are preparing for an economic slowdown, it doesn’t look like there’s much impetus for a TIPS rally here.


Healthy economic data and a strong jobs report have investors rotating into cyclical and growth-oriented sectors and away from defensive and overseas markets. The concern over global recession has abated for the time being and the S&P 500 appears prepared to make a run at all-time highs. Bulls look to be in control here and a risk-on sentiment appears to be in play.


This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not 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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