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If you just want the highlights for now, check out the Executive Summary.
Macro Relative Strength
Intermarket Relative Strength The bears definitely won the battle this week. The Intermarket picture got slammed this week with Equities heading toward the bottom. Commodities held near the highs helping leave a few trading ideas, but not much. Until we see equities moving back up the the chain, we should remain protective. Equities could not get any traction and fell down the hill this week losing to the bears for the first time in a long while. A change in character should have you looking at bounces more skeptically.
Equity Size & Style Rankings Value remains on top while Growth and Small Caps were hit again. The difference this week was the weakness spread to the rest of the markets, which could be a sign we are near a short term bottom, but also has larger intermediate implications if the bounce does not invert the table above in short order. If Value remains on top during any retracement, we should be very concerned. Clicking on the table will take you a more in depth look at the equity ETFs I follow. Nothing was safe this week as the structure and outright losses gives little confidence. No reason to be aggressive until this changes.
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 After stalling last week, we saw 3 of the 5 days this week in negative territory ending with a -42. That is not exactly huge, but is growing. So the 1st signal is fired, now we see if the moving averages can move below zero giving us our second and then final signal to reduce exposure. Of course, good risk management has likely already started the process of reigning in your exposure. Differential signal this week, now waiting to see if it can expand and pull the moving averages negative.
The Advance Decline Line broke the lines this week we have been watching taking the long term structure down a notch. No, we haven’t yet made a major lower low, but the warnings are there. As always, if we can remount the trend lines quickly in the coming days, it will be a big plus for the bulls longer term. Participation is waning as the AD Line breaks the immediate levels this week.
The McClellan Indicators finally succumb to the pressure as well. The Summation Index lost the flatline which isn’t that unusual, but any move below January’s trough could get ugly quick. However, the Oscillator has moved into the extreme zone where short term bottoms are often formed. It could happen in a spike, but remember divergences down here are not uncommon. Summation below zero is not good, under -600 or so is much worse. The Oscillator should forge a bottom sooner than later, but can’t prejudge how far it can take us.
The Moving Average Breadth No divergence formed during this week’s route, but it did put the %>20sma readings below 20%. It can go much lower, but a turn up from under here should accompany at least a multi-day bounce if not more. The %>50sma is back to its low line as well similar to January. Then we have the %>200sma sitting at its January lows as well. This certainly looks like a critical spot for these. If they take out the respective lows, it will be another sign of the change in character, but it will not negate the fact we are getting very oversold and should bottom soon. What it will do is change how we play said bounce. The setup here is nearing a bottoming zone, but the recent sell-off and depth changes how we play the bottoming action. The burden of proof has shifted to the bulls and we are much more careful with how we handle any positions picked up down here.
Breadth Thrust Indicator is now down to it’s extreme zone where we are likely to see a bottom form. We could see a spike or divergence form here over a few days. Stay nimble and combine it with other signals for best results. Finally entering the extreme zone where bottoms have formed, but can go much deeper before it must bottom. The deeper it goes, the more likely a divergence or two will form.
Percent Days gave us two signals in one week, actually in two days. I have been saying a cluster of signals can be a bad thing and still believe that, but when you get back to back percent days, you are usually very close to a retracement. If we are really bad off, that retracement bounce will be like the last couple and last a day or two. If it can build on itself for a week or so, even with light volume, it could be a more durable bottom. Two signals this week give us a cluster which is often a warning, but also gave us back to back days which very often mark a short term bottom, even if things eventually get worse.
Summary: The sell-off continued this week and spread to the rest of the markets. It was orderly enough to not trigger extremes until late in the week, but gave no signs of reversing. This puts us in the position where sentiment is very negative and could cause a swoosh early, but would also likely forge a short term bottom with solid extremes on the breadth picture. This would give a chance for us to get a better bounce to gauge how much longer term damage has been done as I explained above. I know I have been looking for said bounce the last couple of weeks to no avail, but the extremes we are reaching now should eventually produce a bottom we can gauge. I still believe that is when we will get the information we need to identify where we are in the major trend. Right now, it looks bad, but it usually does feel the worst just before we put in a bottom. That said, make a plan and wait for it to trigger. Anticipating here can be hard to stomach and potentially very costly, even if only a couple of days early.
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. If you click on each respective title or the Dashboard for that indicator, it will take you to a page specifically for those sector breadth charts.
Broad Sector Advance Decline Line in pullback mode you can play the barbell. Either look for strength in those sectors holding up or mean reversion in those that have come off the highs very quickly. Of course, this is longer term so combine it with other indicators.
Broad Sector Moving Average Breadth not much survived this week, but the short term readings are sporting some pretty low values. The rub is the longer term readings are taking some damage this time as well. It is worth noting that only 2 of 10 of the %>200sma are below 50%, and not by much.
Broad Sector McClellan Charts are in the same mess as all the others. Many of the Summations are falling hard while the stronger ones were even curled over this week. Click through and look at the longer term individual charts and you will see a few of the Summation Indexes are nearing previous lows themselves with the Oscillators getting pretty oversold.
Broad Sector Breadth Thrust are making their way into the extreme zones. Now is the time to pay the most attention to this indicator as it has a good record on bottoms. There is still room to fall in most and the deeper it goes the more likely you are to see a divergence before the ultimate price low, so keep that in mind.
The New High – New Low Differential 7 of 10 were negative to end the week with most of the damage in Health Care and Consumer Discretionary. None of the moving averages are negative yet, so this is the preliminary warning. Expansion is key to the bears here.
The damage moved out from the high flyers to the rest of the markets this week not really leaving many stones unturned. Even Utilities slightly buckled on Friday. The sector portion of this should be used to help identify money flow inside the markets. This will help show you where the opportunities will be based on your style of trading. I personally will be looking for some mean reversion here very soon. Don’t know how long it will last, but should provide some good short term scalps at least, and then if it turns into more, you will have time to get more heavily involved along the way. This time however, it is not as likely to be as easy as the last few. The character of the markets has changed for now and not in a comforting way. While the major trend is still up, the overall burden of proof has shifted to the bulls until they can gain our confidence back.
Sector Relative Strength Rankings
First, I look at the Custom Indexes and see what they are telling us on a price weighted basis.
Next, 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.
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.
The markets are ugly all around this week. Even the defensives didn’t offer much of a safe haven. High Dividend based sectors are still performing the best as they provide some cushion in rough markets. Protect and wait for an extreme signal, then follow your plan whether it be buying strength or mean reversion. Either way, stay very nimble until more confidence is restored.
I will continue to include the Subsector RS Rankings that will become part of the Sector Select level of my service in the future. Sector Select will provide access down to the subsector level on both breadth and relative strength for those who trade sectors or just like to fish in the strongest feeding lanes. Speaking of strongest feeding lanes, check out this new subsector view I created this week to show where participation is moving to and from. This is where the most focused ideas will come from.
If you click on the table, it will open a page with more segmentation. Take a minute to study how these are moving on a price weighted basis before heading over to review the Sector ETF page or even deeper into individual names for opportunities.
Sector Drill Down
Technology has been one of the hardest hit sectors during this correction. Being the hardest hit, it is also showing some of the most extreme readings. It also happens to be one of the largest sectors.
The Advance Decline Line lost both the trend line and the horizontal line this week while price also lost its trendline. Now, if it can reverse this week and regain said lines, then all might be forgiven…after a bit. The price damage has been hard and fast, so that will need some time or exceptional buying to heal. The loss of the trend lines is not a good sign, but I would still like to see it take out the January low before getting too hot and bothered about the longer term trend.
Percent Days This indicator has some significance in this sector with it being so large. It was very close to having back to back 90% down days. That should signal short term exhaustion very soon or things are worse than we thought. It might take a day or two, but a short term bottom is likely near. If it comes quick enough, it would also signal a failed break down which could induce a fast move higher catching many off guard.
The Breadth Thrust Indicator is showing its 3rd extreme in 3 weeks, but they are not very deep. It could go much deeper, but doubtful with so many so close.
The McClellan Indicators are not painting a great picture here with the Summation making new lows for the year. The Oscillator is at the extreme line and has already formed one divergence with the potential for another, but it would have to turn up Monday to trigger. That will be a tall task, but if accomplished my be a good message.
The Moving Average Breadth has two of the three levels in oversold territory with the %>200sma sitting right at 50%. A move back higher from here would be a solid signal. Not all signals work, but in the past they have given at least a swing opportunity. They must cross back above the low lines to get a signal, not just turn up.
The New High – New Low Differential was negative a good bit of the week which leaves us cautious, but has not been able to get the moving averages below zero yet. If they do turn negative, it will damper (although not negate) other oversold triggers we see.
Technology has been hit hard in this correction along side of Health Care and Consumer Discretionary. It was one of the first to start showing real damage and becoming one of the most oversold. As we see below, a good bit of the early damage has come in the Internet and Software & Services spaces. The other subsectors have struggled over the last couple of weeks.
Next I have singled out the Technology MA Breadth to show a close up of how low some of the sector readings are getting. Remember these are not small subsectors, so it takes a lot to push the readings below 10%.
Technology is not a way to play strength right now, it is definitely a mean reversion play if any and is not for the faint of heart. Below I have the Subsector breadth charts to see where you might want to go fishing.
I have also added a page with all the Broad Sector Technology Breadth Charts to view them in the same layout as the subsectors above.
Here are the Real Estate RS Rankings:
A ton of red on this table with only a few even positive over the last quarter. Those that are positive fall in either the Semiconductor, Telecom & Wireless or Dividend Tech space. Nothing wrong with playing the strength out of a correction, but seeing double digit negatives on the month and quarter at the bottom along with the oversold readings above do have my interest peaked.
If you want to dig deeper into the Individual Technology RS Rankings by broad sector and subsectors, they are here with FINVIZ links for easy chart review. Note that as large as the subsectors are, some do not expand well for better viewing, so 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.
One last note: Make sure you have a plan on any new positions here. I won’t say be comfortable because that is never the case near a bottom. The market direction is down right now and no one can say when it will turn. The breadth readings suggest it will be sooner than later for a bounce, but there is nothing that says how far that bounce goes (and recently they have not gone far). There is nothing wrong with sitting things out until the picture shapes up a bit. Letting things firm up may reduce the possible outcome of your trades a little, but can also increase the probability of them working a lot.
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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