May 31, 2014 Strength In Numbers

12-23-2013 Cover Graphic

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For more background on this report, the Strength In Numbers ppoint further explains what I am building here.  Previous reports can be read here.

Macro Relative Strength

5-30-2014 Intermarket RS

5-30-2014 Equity Size & Style ETF RS Rankings

Another solid week for equities in general with $QQQ running up the RS list to join $SPY, but $IWM and $DIA didn’t impress.  Large cap growth $QQQ led the week and closed at new highs which is not a bad thing.  The one glaring drawback in equity land is the continued lagging of all the small caps.  If they don’t pick up the pace soon, this could very well be the narrowing final leg, but it is a little early to be worrying about that with the other indexes making new All-time highs.  The other part everyone is fixated on is the $TLT.  This is something to keep an eye on, but bonds and equities can go in the same direction for a long time if they want.  Doesn’t happen too often, but when it does it can wear people out.  The charts led again (as usual) and $QQQ made new highs as well as ran up the RS ranks.  Markets are in gear right now, but $IWM should be watched as a tell in the short term.  It is moving forward but seems to be grinding its gears at the moment.

Universe 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 showed slight expansion this week with no negative readings.  It also managed to cross the moving averages higher pushing back any negative signal even further.  That said, it needs much stronger expansion to get excited about anything here.

5-30-2014 Universe NHNL

The Advance Decline Line is back near the highs while the custom index is testing the underside of the trend line.  This is a composite index, so no new highs here yet, but if the AD Line can clear the highs, I would feel much better.  Basically sideways for 4 full months.

5-30-2014 Universe AdvDecLine

The McClellan Indicators both look promising.  The Oscillator saw a nice thrust recently while the Summation Index continues to improve.  The Summation still needs to clear the flatline, but cross ups below zero have a good track record in these markets, so I pay attention.

5-30-2014 Universe McClellan

The Moving Average Breadth reading has not improved as much as the others, but it is grinding higher.  This is a testament to the lagging small cap sector, but with all readings above 50%, things are just kind of stuck in the middle.

5-30-2014 Universe MA Breadth

Breadth Thrust Indicator put in a short term top this week, but that is not really a signal in my book.  Better indicator for bottoms, and if you must use it for tops, look for multiple divergences with fast drop in thrusting action.

5-30-2014 Universe BreadthThrust

Percent Days no new action this week.

5-30-2014 Universe Percent Days

Summary:  The Universe has still not made new highs, but it is improving at a measured pace.  The intermediate McClellan Summation Index is the brightest spot and points to continued improvement.  The NHNL improvement also brings down the alert a bit for now as well.  The breadth and universe are not matching the new highs of the major indexes yet, but seem to be working for at least a test in the coming weeks.  

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.  For this section, I have posted the Breadth Dashboards for the indicators I use.  For the first three indicators below, if you click on each respective title or the Dashboard, it will take you to a page specifically for those sector breadth charts.  I did not include pages for the Breadth Thrust or NHNL this week.

Broad Sector Advance Decline Line shows most sectors continue to be at or near recent highs.  Worth noting the ones that made the most progress this week were still defensive sectors like Utilities, Real Estate, Energy and Consumer Staples.  That doesn’t mean an end to the run, but shows more flow to safer areas suggesting a maturing move.  But, is that really news to anyone?

5-30-2014 BSec AdvDec Line Dashboard

Broad Sector Moving Average Breadth shows there are many sectors that look better than the universe as a whole.  Basic Materials is probably the biggest drag at this point.   Technology and Health Care have been a concentration the last few weeks and continue to improve.  Now, it looks like Consumer Discretionary is battling back into the game.

5-30-2014 BSec MA Breadth Dashboard

Broad Sector McClellan Charts are probably the most improved.  The thrusts in the Oscillator coupled with the turns in most of the Summation Indexes is a very welcome sight and may be the start of something good.  A quick failure would derail it, but for now it is supportive action.

5-30-2014 BSec McClellan Dashboard

Broad Sector Breadth Thrust is still not giving much.  Waiting for its time in the sun again, might be waiting for a while.

5-30-2014 BSec Breath Thrust Dashboard

The New High – New Low Differential is shoring itself up with all the other measures we follow.  The only notable surge was in Consumer Staples which continues to get stronger.  No negatives to close the week, but as with the composite view, nothing really to get excited about yet.

5-30-2014 BSec NHNL Dashboard

Through the sector world, the Universe continues to put in the building blocks for another challenge of the recent highs.  Most measures continued to improve this week.  Consumer Staples is starting to stand out more as it makes new highs.  On the retracement side, Consumer Discretionary looks about ready to make a move.  I also still like the rest of the catch up sectors, but we may need a few days to set up again.

Sector Relative Strength Rankings

First, I look at the Custom Indexes and see what they are telling us on a price weighted basis.  Click on either chart for a deeper view.

5-30-2014 Broad Sector CI Relative Strength5-30-2014 Subsector CI Relative Strength

Next, I look at a Broad Sector ETF Proxy which I use Vanguard ETFs to make sure things are similar and for some tradable ideas.  Below that is the Equal Weighted version for comparison.

5-30-2014 Sector Proxy ETF RS Rankings5-30-2014 Sector Proxy EW ETF RS Rankings

This will differ a little due to the different make up of the Capitalization Weighted ETFs. If you click on the table, it will take you to a page that will go much deeper into the Sector ETF Relative Strength world.

Summary:  Most areas moved higher this week and we saw some shuffling in the rankings, but nothing to show a material change although it is continued improvement.  The most notable was the performance in the defensive sectors outshined that of the cyclical areas while new highs were being made.  One reason was Technology.  Note the difference in ranking between the cap weighted and equal weighted proxies for Technology.

Also, check out this subsector view I created to show where participation is moving to and from.  This is where the most focused ideas will come from.

Sector Highlight

This week we will take a look at Financials.  Last time I focused on Financials in late February, I suggested they needed to perk up, and it has taken until now for that to begin.  That lack of energy in the group has added to many a top call while we were pulling back.  So many said Financials had to participate for us to move higher.  I admit they have in the majority of the previous rallies, but no one sector must participate if the rest are doing well.  Below is a reminder of the Sector Breakdown in my world.

2-28-2014 Financials Subsectors

The Advance Decline Line as mentioned above the broad Financial sector showed more sideways movement than breakdown during the recent malaise.  A recent bounce off the shorter trend line now has the AD Line challenging the upper trend line.  A break above could help price wake up and start moving again.

5-30-2014 BSec AdvDec Line Financials

Percent Days with as large of a sector as this one is, it is kind of crazy how many 80% & 90% days we see.  Shows the emotion in this sector stays pretty elevated.

5-30-2014 BSec Percent Days Financials

The Breadth Thrust Indicator shows there hasn’t been much excitement here since late January.  As the coil gets tighter, the break will be stronger, but which direction is not specified.  However, the larger trend is up, so it favors that direction.

5-30-2014 BSec BreadthThrust Financials

The McClellan Indicators looks sweet and is what caught my attention this week.  The Oscillator showed a solid thrust through mid week which allowed the Summation index to cross and surge above zero.  It is a signal worth paying attention to and has markets good entry points in the past.

5-30-2014 BSec McClellan Financials

The Moving Average Breadth has yet to catch up with the McClellan.  The %>20sma is moving, but the %>50sma is stuck under 50%.  This has a lot to do with the weakness in Regional Banks which is the largest Subsector.  Those charts can be seen at the end of the section.

5-30-2014 BSec MA Breadth Financials

The New High – New Low Differential showed an expansion in new lows early May, but never translated to much in the NHNL Differential or price action which is bullish on the margin even (especially) with tall the negative chatter out there.

5-30-2014 BSec NHNL Financials

The Subsectors view below shows the Regional Banks still the laggard, but if you are targeted, you would have been concentrating on Insurance anyway.  Or maybe improvement in Credit Services or Investment Services in the last few weeks.  Even Money Center Banks ADLine looks prepped here for a new high.

5-30-2014 SSec AdvDecLine DB Financials

The fact is hasn’t broken down and actually showed improvement while negative sentiment has remained elevated is a positive.  If the markets are going to continue higher, I do believe we should see some catch up from Financials.  Below are the Subsector breadth charts for review:

Credit Services

Insurance

Investment Services

Money Center Banks

Real Estate Services

Regional Banks

I have also added a page with all the Broad Sector Finanicials Breadth Charts to view them in the same layout as the subsectors above.

Here are the Financials RS Rankings:

Subsector RS Rankings5-30-2014 Financials CI Relative Strength

ETF RS Rankings5-30-2014 Financials ETF RS Rankings

Money Center Banks are leading the ranks, but in my view, Insurance is just as strong or stronger.  Regional Banks are definitely the drag.

Top 40 Financial RS Rankings5-30-2014 Top 40 Financials RS Rankings

Bottom 40 Financials RS Rankings5-30-2014 Bottom 40 Financials RS Rankings

If you want to dig deeper into the individual Financials RS Rankings by broad sector and subsectors, they are here with FINVIZ links for easy chart review.  Note larger Subsectors do not expand well for better viewing, so for those lists, I suggest using FINVIZ for closer examination once you have looked at the rankings on the main page.   You may be surprised what you can find.

Final Note:  The Major Indexes continue to grind out the bears while leaving a morsel laying around here and there for the bears to chew on.  I understand it will eventually turn into a larger correction or bear market; and I also know I will not nail the top and seem to be late to many.  That’s okay, because it has kept me from panicking the last 3…4…5 times we have been here.  The breadth and relative strength of these markets are not giving you topping action yet.  They are still showing a maturing bull market that is narrowing a bit into the larger cap players; but as I have said all year, that action can go a lot longer than most think and narrow much more before breaking the back of this strong trend.  I continue to see the trend as slow at the moment, but solid just the same.

Have a great week!

G. Thomas Lackey Jr, CMT CFP®

Follow me on StockTwits and Twitter @gtlackey (All market data above are derived from Stockcharts.com, Esignal, and Reuters Datalink)

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