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Macro Relative Strength
Well, if you were away from the markets this week and are just catching up, nothing much happened; but as usual you missed a lot of action and maybe even a few important messages from the markets. That is one of the debates that rages between some longer term investors and short term traders. While it is true the longer term investor does not have to hang on every nuance and can take a higher view of things, there is a lot to learn from many of those nuances even if you are not trading them. That is why true professionals are always studying the markets and doing their homework no matter how many trades come out of it.
This was the second weekly doji for the $SPY in a row. This week’s candle had longer wicks as the volatility increased, just not the end result. Buyers continue to fight the good battle keeping the bears at bay for now, but the markets need to move over these levels or we are likely to see the bears a little more emboldened. That said, the structure of the Intermarket RS list is still favoring equities and this week’s drop in the $UUP RS helps improve it by putting all the Equity proxies at the top. The Size and Style list is not playing along though. I do like that Small Caps are starting to move up, but it is more due to Mid Caps underperforming than it is due to small caps really flying. We are entering the seasonal sweet spot for small caps so we won’t rule them out yet. The intraweek news driven volatility has us on watch because the selling was real, but Friday’s erasing of the fast drop sent a message that it’s too early to throw in the towel on this move and the potential for a Santa Rally. With the Intermarket RS list supporting the move, we would like to see the Size and Style list shape up some.
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.
The sector world did not impress me that much this week. We didn’t have any that really stand out as different than what we have been seeing. Looking just above, you can see most of the Top 30 ETFs had pretty solid weeks and most of the bottom 30 remained losers.
The only two things that stand out for relative strength changes are Consumer Discretionary, which continues to move down losing 20 more points this week on most of my sector lists now putting them near the bottom, and Real Estate moving up on most lists which is not what many would be expecting if rates are about to rise. This rise in RS brings us to take a closer look at the chart and IYR might not be there yet, but it has put in a nice base that looks to be forming an inverse head and shoulders pattern with an ugly shoulder trying to morph into a triangle pattern. The pattern has to prove itself, but if it does it will target a better than 10% move higher.
A few subsectors like Precious Metals and Credit Services RS jumped while Construction Materials and Transportation dove, but that is not a lot of shuffling in a group of 49. Overall, sectors saw some jockeying but did not see a lot of change in character from week to week, but neither did the markets. If anything, the back and forth looks to be setting up nice consolidation patterns in the majority of sectors (especially all the heavy weights) that are usually healthy and if broken can lead to a nice move. They can, of course, break in either direction, but often it is in the direction of the previous move.
Broad Market Breadth
Universe of 3,300+ 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.
Things still look okay, but it was another unimpressive week for breadth.
- Moving Average Breadth all held decently during the intraweek raid.
- McClellan Summation Index crooked, but didn’t fall much during week and remained positive and above the signal line.
- NHNL Differential was negative all week and the Moving averages are turning back down without going positive.
- Advance Decline Line and Price made a new high for the move but then fell right back.
The absence of any Small Cap strength showed in the breadth picture, but didn’t do much damage yet. Not much to lean on right here by the bulls or bears, except that slow deterioration that drags out definitely favors the bears. However, if we get follow through from Friday’s move and small caps join in, these measures could see swift improvement continuing the trend off the fall lows.
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.
Clicking on the highlighted links will go to a page with the dashboards for the Subsectors.
Sector world continues to bump along on an upward path in many sectors except the Commodity based like Basic Materials and Energy which haven’t improved much, if any. The rally needs to remain broad and pull the small caps more into the mix for us to see improvement. Most still look to be holding up during the challenges we have been seeing. I am watching for which sectors start to move out and act differently as we break away from the current consolidations so many sectors are currently in. Not much to read into week over week. New highs are not inspiring, but nothing looks dangerous right here on the downside really either.
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 week didn’t add or subtract much from my overall view. There was some breadth deterioration, but the ending strength we saw in the face of difficult news 3 days in a row needs to be noted. There is definitely a battle going on here, but buyers continue to step up when needed, and they were needed Friday. The only rub here is we can’t seem to move over the recent highs. The bulls need to see this soon or we could flounder through Christmas. That wouldn’t totally rule out Santa as we still have the last week, but it could spook a few out of good positions along the way.
Have a great week!
G. Thomas Lackey Jr, CMT CFP® CFS
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