April 12, 2015 Strength In Numbers
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For more background on this report, the Strength In Numbers powerpoint further explains what I am building here. Previous reports can be read here.
Macro Relative Strength
We had a very interesting week from an Intermarket RS perspective. Always interesting when $UUP is at the top, but with $USO now right on it’s tail, it likely causes a double take from more than just me. Then, seeing $IWM & $QQQ right below that only to find $SPY & $DIA in the bottom half of the list (but expect that will change quickly with any continuation), it would be foolish of me to try and explain why we are here. Instead, let’s stick to how we can use it and make money. Coupling the $IWM $QQQ strength with the Equity Size & Style RS List’s structure keeps a positive slant on things for now. As I said last week, the market is continuing to grind at this point with an upward bias for the most part. The action is not bearish, but the buyers haven’t been able to put together any force either for weeks now.
At this point, we are heading into earnings season and the expectations are pretty low from what I am sensing. As always, we need to be more concerned with the reactions than the actual numbers that are reported. There is a lot of jockeying that goes on with expectations leading into the actual numbers. If investors have become too morose, then we can rally on bad numbers; or if we get good earnings but bad outlooks, we can quickly see the reverse. Bottom line is to continue to look for opportunities here, but don’t be blind to the potential impacts of earnings on that or related positions. Some choose to step aside during earnings altogether. I think that has more to do with time frames, but my point is to know your environment at all times and right now earnings is the next set of major catalysts on deck. The overall market structure is positive especially on the growth front. The flags we can see on the majors indexes are the next impediment to continuing the leg higher that began with the February breakouts.
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 trade-able 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
Of course, I must start out by pointing out the sheer dominance we see this week from the Energy space after continuing to point here most of the year. We are seeing big jumps in the RS on all of the lists. Who knows how long it will last, but it is working at this point and many charts have various resistance points. Most have plenty of room above if we get continuation in the coming weeks. I know there have been a lot of back and forth as well as a few scary spots where it looked like another breakdown was coming, but the divergences we were seeing all over different indicators, sentiment and other comps were too glaring to let go of. If you followed these with a time frame longer than a few days or a week, congratulations as you have been rewarded in the last couple of weeks for your diligence and patience. There were certainly plenty of places to buy strength, so there might have been clearer paths out there for your style, but I know many portfolio managers and longer term players who relish turns like these as opportunities to get in when everyone else wants out and let their patience make them money. The funny part is for those who are good at the timing piece, often they don’t end up needing that much patience and they are theoretically closer to their stops too!
I continue to see growth areas performing well in this environment. Technology and Health Care both had solid weeks after some recent weakness. These are two heavily weighted sectors in most indexes and most portfolios for that matter, so some renewed strength here would be a solid sign for the overall markets. It does look like investors still have an appetite for risk here, but are not coming in with the same force we have become accustomed to. On the flipside, Real Estate took a beating this week with rates moving up a little. Utilities also didn’t fair that well either which is what we would expect with $TLT waffling a bit. I am still not sure about the direction there, so watching all three of these for clues is where I am at right now. Overall, I still believe in “lower for longer” on rates, so don’t expect weakness in these areas longer term from right here. These could be laggards as more defensive sectors overall if the markets start another strong leg higher, but still think they can move up with the broad trend. Relative strength view still points to some risk appetite as money continues to be put to work in more dynamic and growth oriented sectors. Plenty of fishing lanes open right now, so pick one and find your spot.
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
Percent Days
While many of the major indexes continue to build out flags, our price weighted index is inching to new highs with plenty of decent to positive breadth action underneath.
Positives:
1. NHNL remained steady for the week with new lows all but disappearing for now.
2. Advance Decline Line is breaking its down trend line.
3. MA Breadth measures all coiling above 50%.
4. McClellan Summation Index crossed up and is moving away from the flatline while the McClellan Oscillator is trying to make new highs for this move.
5. Breadth Thrust Indicator still wants higher it seems.
6. Price remains above the neckline after a breakout back test and now making new highs.
Concerns: (more comments than concerns.
1. NHNL is not making much headway yet.
2. MA Breadth is still coiling.
2. There has not been much force in either direction.
As you can see things are shaping up pretty well, but no real exciting strength data point to highlight. These are potential clues as we are consolidating, one I like to see improving here the Summation Index as it is one of the most important to follow for intermediate action. It continuing to strengthen from here would be a big plus.
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. For this section, I have posted the Breadth Dashboards for the indicators I use.
Broad Sector Advance Decline Line
Clicking on this section will go to a page with the dashboards for the broad sectors like above as well as all the Subsectors dashboards.
Broad Sector Moving Average Breadth
Broad Sector McClellan Charts
Broad Sector Breadth Thrust
The New High – New Low Differential
Sectors went with the markets this week with a few notable exceptions which all had some influence from the FED as well as interest rate expectations. After complimenting the strength last week in Utilities and Real Estate, those two sectors lagged this week with Real Estate taking the brunt. I thought Utilities might catch up with it. It was not my expectation that Real Estate would so quickly come back to Utilities, but that is the markets for you. My overall premise may have been right, but Mr. Market chose a very different path to get there than I suggested. Financials were slightly negative for the week feeling some drag from these areas too, but the rest of the sectors performed pretty well and are taking their turns grinding higher from week to week. The good thing is the breadth and participation is following along in most cases as well providing support for the move.
Just as I do above, in sectors I put a lot of weight in my analysis on the McClellan and Moving Average charts. Many sector McClellan Summations are starting to turn back up and the Moving average participations are helping me figure out where we are in the moves. Where I definitely like entering markets at extremes as we talked about with Energy, Utilities and others in these reports, I also understand extremes don’t come around that often, so we learn to use the rest of the breadth measures to help position where we are and take the opportunities with the best “weight of the evidence” at that moment. As a portfolio manager who needs to incorporate new clients into portfolios at various stages of the markets, tools like these provide invaluable insight to help reduce the inherent risks in that process. Your exit may indeed be the most important point of the investment, but I find your entry is still a very important component of the plan.
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: The week was positive and I am as well. The markets are not glaring with strength, but continue to do what is needed to keep the uptrend alive and the participation under the hood respectable while we have corrected through time. We have seen a few mini-spurts this year so far and that have many wondering if this is us running out of gas or rearing up for another run. I still lean toward the latter because I have no compelling evidence to shift my view to the former at this point. If the markets want to fail here, that is fine; but so far that is not the hints we are getting as we continue through the back and forth of the recent weeks. We need continuation to make me more optimistic, but I hate to say cautiously optimistic until then, because caution may be a little strong. Consciously optimistic may be a better way to leave it.
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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