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For more background on this report check out Strength In Numbers Explained. Previous reports can be read here.
Macro Relative Strength
Intermarket ETF on FINVIZ
Size & Style on FINVIZ
It was a tough mental week for traders and investors as the markets gave back last week’s gains which quickly took the wind out of the New High talk while ratcheting up the volume on the top calling. To be sure, the action was not positive, but by Friday we saw fear spiking once again with the markets just a couple of percent off the highs and still within the trading ranges we’ve been in most of the year for all the majors…well kinda. $QQQ broke out of its range on the big move last week and remained above that range through the end of this week. Actually, the $QQQ didn’t even give up half of last week’s gains and is currently back testing it’s breakout. If the back test doesn’t hold (an overthrow for a day or two would not surprise me, so give it a little room), then the others will have likely broken down out of their range and the correction can begin. If it does hold, then I believe we could see all the majors make new highs in the coming weeks. As we will see below, the markets are getting more narrow, but remember, that can last for a while before we see major tops in the cap weighted indexes.
The relative strength structure of the Intermarket list is still acceptable, but teetering with $QQQ holding the top spot, but the other three are slipping and $IWM is sitting in the middle. After this week’s action in small caps, it’s no wonder. Bonds were the only green in this list for the week as investors chose relative safety plays to hide out. Of course, commodities were the big story as most of them lost big for the week. Even agriculture commodities have not been able to avoid the mess. Overall, it proved to be a tough environment this week. I think it was somewhat masked until Friday by the strong big cap moves off earnings for a few marquee players like $AMZN while the rest of the market withered behind the scenes.
From a broad view though, nothing great came out of the week, but nothing pivotal either. Looking at the Equity Size & Style list, we can see it is a little of a mess right now, but Large growth continues to lead overall and other growth segments are still hanging high on the list. It is my experience that when growth is leading, the markets may narrow and/or correct, but don’t often see major tops in the immediate future.
We go into next week with some caution, but also realizing the fear spiked quickly again which has been a harbinger for trend continuation up to this point. I still give the markets a decent chance to hold these ranges and give this fear a chance to work again, but each test does increase the likelihood of an eventual break which in this case would be down. That same idea goes for the topside as well. Definitively breaking these ranges holds the key to our next move.
Sector Relative Strength Rankings
First, I look at the Custom Indexes that I use for all the breadth work to see what they are telling us on a price weighted basis.
Next, I look at a Broad Sector ETF Proxy which I use Vanguard ETFs to make sure things are similar and for some tradeable ideas. Below that is the Equal Weighted version for comparison.
This will differ a little due to the different make-up of the Capitalization Weighted ETFs. If you click on the table (or here), it will take you to a page that will go much deeper into the Sector ETF Relative Strength.
Top 30 Sector ETF RS Rankings
Top 30 Sector ETF RS Rankings on FINVIZ
Bottom 30 Sector ETF RS Rankings
Bottom 30 Sector ETF RS Rankings on FINVIZ
When you break the markets down into bite size pieces like we do here, there is always some green to find. This week that green was mostly in the Real Estate segments and Medical Equipment. That’s it. Real Estate is not where many have been looking for it to come from as the fear of rising interest rates has remained elevated, but this week those charts held well while others crumbled helping it make some headway up the relative strength list. I have favored Real Estate for a while as a play on the “lower longer” interest rate idea, but until now it hasn’t impressed. This week’s hold was a good sign we might finally want to start paying more attention here. On the other end of the spectrum, many energy and basic materials segments were in freefall after weakening in recent weeks. They are handily oversold at this point and may be ready for a bounce, but relative strength won’t tell us that; we have to wait until we get down in the breadth world to size up any short term potential.
Like the rest of the markets, the four horsemen we spoke of last week didn’t perform this week and some lost a little ground relatively. Not detrimental, but the best performance will likely come when these sectors are back at the top. It is also worth noting the two sectors that made the most headway this week were Real Estate and Consumer Staples which are not exactly the most offensive plays. I look at this action as another caution showing in the markets, but also see these sectors as opportunities while the broader markets are choosing a side.
It was a tough week in most sectors and subsectors as well with overriding signs of caution in the performance which makes sense when you have a 2%+ down week. If it can get follow through, we continue to throttle back risk and look for more defensive opportunities to outperform at least on a relative basis, but also potentially on an absolute basis since the long term broad market trend has not turned bearish. Rotation is likely to continue until more confirmation the money is ready to leave the markets all together for now.
Broad Market Breadth
Universe of 3,070+ stocks from 10 custom broad sectors and 49 subsectors. Universe contains only stocks (that are both optionable and shortable) with no Preferred stocks, CEFs, ETFs, or UITs to skew the breadth measurements. There is a breakdown of the universe in the powerpoint presentation link at the top.
The New High-New Low Differential
The Advance Decline Line
The McClellan Indicators
The Moving Average Breadth
Breadth Thrust Indicator
Last week the breadth was the area that kept us grounded as it was showing mixed messages. It wasn’t confirming the strength, but also wasn’t sick enough to foretell imminent weakness. It remained stuck in the middle as we have been for so much of 2015, just kind of bobbing along. The negatives are growing, but still not busting out. Even if we do get stronger breadth signals to sell, we must remember that as with any technical signal, price needs to confirm before we take action on them.
1. Breadth Thrust Indicator went from highest reading since February back to extreme without price making a new low similar to December 2014 or January 2015.
2. McClellan Oscillator is nearing extreme reading for 2nd time this year and this month.
3. No Percent days on the downside during this pullback.
4. Custom Index still above the last breakout of the previous range.
1. NHNL Differential has triggered all 3 sell signals as it drops below last October levels pulling both moving averages negative as well. New lows spiking, but lack of new highs is the real culprit.
2. Advance Decline Line making another lower low as it is trending down.
3. MA Breadth reading failed at the midway point and are all heading down again.
4. McClellan Summation is working on it’s 2nd failed signal since losing the flatline.
This week market participation took a decided hit in many areas, especially the mid to long term readings finally breaking the malaise they have been in most of the year. This action puts the markets at a more critical spot. It can be decidedly bearish if it builds on itself, but when in bull markets, that bearishness doesn’t play out very often. In fact, in bull markets these end up being the buy signals everyone is looking for. Of course, we won’t know until things play out a bit more. There is nothing wrong reigning things in and taking a wait and see attitude the shorter your time frame, but longer term broad market investors only have half the equation so far. Some longer term breadth sell signals, but no price action confirmation so far. This sets us up for either a quick slip’n’slide like we saw last October or another V-bottom most of the times we have seen breadth weakness during bull. Anyone who tells you they know which it will be doesn’t, but we are close to well defined levels in many broad market readings and short term breadth readings are nearing oversold extremes. This tells me that IF we see positive price action near these levels, it could just be another range test in the longer term uptrend. With well defined stops just below the range lows, it should provide a solid risk reward opportunity.
Broad Sector Breadth
This can give us a first level view of the flow within the broader market. It is a true measure of the markets’ breadth.
Broad Sector Advance Decline Line
Broad Sector Moving Average Breadth
Broad Sector McClellan Charts
Broad Sector Breadth Thrust
The New High – New Low Differential
Clicking on the highlighted links will go to a page with the dashboards for the Subsectors.
The poor action this week in the broad markets was widespread as we saw above in the relative strength lists, it also took a toll on the internals in many sectors. The idea the markets have been narrowing is true, but a look here shows it does seem to be much more pronounced in some sectors like Energy and Basic Materials; until this week when the new lows started to grow across various sectors and the weakness infiltrated most of the readings above. The stronger sectors are still looking okay on most long and intermediate term breadth measurements and the short term readings started hitting some watch areas this week. The Breadth Thrust Indicator shows this action the best, and if you click through the dashboard above, you can see this indicator for all 49 subsectors as well. When this many align in extremes, we are usually near a decent bounce and every new leg starts with a bounce…
If you want to play in sectors right here, you have two distinct scenarios to attempt. You can buy recent strength that has pulled back during this but still holding strong breadth and relative strength like Financials, Health Care and still potentially Technology or Consumer Discretionary depending on their action off the lows; or you can monitor washed out sectors and make a plan to take advantage of the snap back potential. The latter is only for the most nimble traders, those with long time frames and/or deep pockets. Basically, it is not an easy trade to handle, but can be very profitable if you can find your edge.
Don’t forget the Breadth Compilation Charts allow you to view all the relevant breadth indicators on one chart for each sector as well as the entire universe. One thing to look for is when breadth extremes line up in multiple indicators on a chart.
Final Note: This is a tough spot in a not so easy market environment. There is nothing wrong with waiting until the smoke starts to clear and finding your spots then. These markets have frustrated many people for a good bit of 2015 without really going very far. Step back and try to take a fresh look at where we are and let the action lead you from here. I like to work on confluence, and that is just not there right now. When we really start to take a definitive direction, you start to see things align early enough to still catch a good chunk of the move. All of that said, if we do see positive action near support early this week, make sure you are open to recognizing that too.
Have a great week!
G. Thomas Lackey Jr, CMT CFP® CFS
Follow me on StockTwits and Twitter @gtlackey (All market data above are derived from Stockcharts.com, Esignal, and Reuters Datalink)
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