I haven’t done videos in a while, but really like them when I do (not a big fan of typing). I think they can make it easier for me and by followers if I can go more this way, so Let’s start off with a few thoughts in IWM. I take a look over 3 timeframes with two different technical tools on each level.
As always I hope this helps!
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Previous reports can be read here.
Macro Relative Strength
This week’s market action makes for strange bedfellows as $UUP was positive along with $DBC $DBA $GLD and even $USO eked out a gain. As interesting as it might be, this uncertainty is not favorable for the equity market which all lost ground on the week leaving all 4 proxies in the bottom half of the list still. It is hard to trust things when the macro alignment is as we see it here. The Size & Style list also lost ground this week with Small Cap segments falling to the bottom of the list while growth areas also gave ground. This move heightens level of caution that this will ultimately see a more significant retest of the lows. It still is likely to have some back and forth before we do get a full retest, and a harsh snap back to the top of the range would not surprise me, but both of these RS lists are getting less favorable to the equity case. Until that improves, it is worth being on higher guard.
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.
Not much green on the screen for the week we just ended. The lists are ordered clearly in a defensive position with Utilities, Real Estate and Consumer Staples dominating all the top positioning. As I mentioned last week, while we are working through this phase, we should see new leadership begin to emerge. They will be the sectors that stop making new lows and are more flat on down days while exerting strength on up days. After just a little bit of this type of action, you can start to see the separation by such sectors. While the defensives are clearly leading here during the volatility (and have an interest rate tailwind), I am not ready to say they are the real new leaders. I would rather wait until we start to see some improvement and then look back to assess. This way we don’t jump the gun, and if the trend really is ready to improve, these pockets of strong action will start to cluster in the sectors and give us our clues. For now, the defensives are clearly leading and will likely continue as long as the fear remains palpable, but I don’t think anything is a given in this volatility. If opportunities present themselves, adjust for the heightened risk accordingly and be willing to take profits quicker when the markets present them. The longer term an investor you are, the more patient you should be here until the relative strength picture as a whole begins to improve.
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 custom index price chart looks to be breaking down the flag or wedge that developed over recent weeks. It may morph into another pattern, but the simple break here brings the chance of a harder retest up a few notches. The breadth data is supporting that idea too as it is hard to find many positives out of the action. It is likely we have seen the momentum and breadth extreme lows for this move, but the price lows could still be in front of us.
My mantra in recent weeks has been the long term breadth picture was still a concern, but if the short term readings could continue to stay strong, we might be able to go ahead and move out of this. Well, those short term readings did in fact deteriorate heavily this week with the market action. This is putting the retest front and center in this section as well (pattern seems pretty clear doesn’t it, maybe too clear?), and it also has us looking at how the breadth reacts if we do in fact move to lower lows. The path of least resistance seems like it is down now, but when we are down in these zones it doesn’t take much to form a divergence which we always like to see in the latter stages of corrections.
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.
Just as we noticed in the universe breadth readings, here we are also seeing most of the short term readings giving up all the improvement we had seen. There are some sectors performing decent, but those are mostly defensives. The consumer is still doing okay too, but nothing to really draw our attention there yet. Financials showed some strength this week as well which was a bit surprising so we will take note and see if it can continue to improve next week. Health Care was on the opposite side of things this week as it got caught in the political crosswinds, but this didn’t cause all the selling. That was a very full boat, so I would expect increased volatility there for a while in both directions after such a strong trend; which means we will need to find new leadership to drive the next leg. Some of the larger weighted sectors will have to step up before we can expect the markets overall to gain any traction. It could happen anytime, but with everything else pointing to a retest, I would use the sector action to spot early improvement in sectors where we do find a bottom. We see the defensives like Utilities, Real Estate and Consumer Staples leading in breadth action. Go with it as long as it continues, but be watching for the emergence of some more cyclical sectors to clue us into more internal improvement which can better support a rally attempt.
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: Markets did not deal well with the setup they were dealt after last week’s FED reversal. The selling continued to win out and many indexes are breaking potential corrective patterns off the August lows. Almost all the action points to the retest scenario as the highest probability, but everyone seems to be expecting it this week. That has me preparing for it, but I also would not be taken aback at all if we rallied hard into the end of the quarter and maybe the whole week. This goes with the idea that markets rarely do what everyone is watching for, but they often surprise us. Even if we were to see such a bounce, it would take a good bit of internal improvement for me to see it as anything more than just a bounce. Actually, I would say the harder and more violent the bounce, the more likely it could fail. Unless, of course, that violence is accompanied by exceptional action under the hood and showed very broad participation. With this bifurcated view of where we go, many investors might want to just step aside and wait until we actually see such internal improvement. Only those willing to make the short term decisions as necessary should be trying to position with all the crosscurrents we are wading through at this juncture. This too shall pass, but when is still a big unknown to all of us.
Have a great week!
G. Thomas Lackey Jr, CMT CFP® CFS
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Below is a video to explain all the information available in my RSI Charts. These charts are the basis for the Triple Play Charts as well as other posts on this blog. If you want more in depth RSI review be sure to check out The RSI Series as well. Also if you want a printable explanation you can find it at Breaking Down the Triple Play Chart