April 19, 2014 Strength In Numbers
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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 can be read here.
If you just want the highlights for now, check out the Executive Summary.
Macro Relative Strength
Intermarket Relative Strength showed a little improvement this week as Equities saw a snapback. All major indexes put in a better than 2% gain offsetting much of last week’s losses…but not all. This helped move them up the ranking a little, but not enough for us to come off caution. This doesn’t mean you have to wait for an all clear (we rarely get those in the markets), but it does mean all new positions should be on a short leash and old ones that aren’t bouncing need to be watched even closer. Equities began moving back up the rankings and put in decent reversals, but will need more follow through to move them back in the top half of the list.
Equity Size & Style Rankings sported green arrows across all weekly numbers, but Growth and Small Caps are still lagging a bit with the exception of $IWP which led this week. The rankings didn’t change much, so neither does our stance. Safety plays continued to be bought this week even with the Growth snapback. No change in message here with just one week bounce. Still cautious until Growth and Small Caps climb back up the rankings.
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 came in Monday with a slight negative only to turn back positive the rest of the week. Bears can’t get expansion to the downside here yet, but the Moving Averages are both threatening to go negative on any further weakness. Not out of the woods here yet; it will take a decent expansion of new highs in the next few weeks to right the ship here. Differential moved back positive in the current week, but not strong enough to be comfortable. It will only take a couple of big days up or down to solidify direction here. Right now, it is muddling.
The Advance Decline Line narrowly recovered all the broken trend lines this week. Here again, a good start, but not enough to be super comfortable. If we continue higher in the coming week and move away from the lines, all is forgiven and they remain useful. If we lose them early, there is a good chance we would see another quick leg down. Participation during this week’s bounce was good and it kept the line above board. The fact that the ADLine is outperforming price is a good sign longer term.
The McClellan Indicators finally hit an extreme on the Oscillator before rebounding early week. The rebound also crooked up the Summation index which is more important. This week I added larger green arrows whenever the Summation Index turned up below zero. Only one of those failed back in the Spring of 2012, but the rest have produced nice intermediate turning points. This time may be different, but with that track record it is worth noting the potential. If the Summation fails to cross and move higher, it can lead to a swift selloff, so remain diligent. Summation curled up as the Oscillator moved off the extreme which is a good one two punch, but needs to cross the signal line and then the flatline to solidify the turn.
The Moving Average Breadth did see enough action this week to fire a buy signal on the %>20sma and almost the %>50sma, but not quite. The short term signal usually puts in the momentum low at a minimum, if not the price low as well. If we do need another dip to put in the price low, it should be sharp and swift and put in a divergence. The problem is it could also turn into a waterfall from these levels. That said, I still think the signal should be trusted until it fails. We got our buy signal in an uptrend last week with the %>20sma albeit not as optimal positioning for the longer moving averages as we have seen over the last year. A quick failure would either set up a divergence or a waterfall. Doesn’t make things any easier.
Breadth Thrust Indicator formed a pivot low early week and ran higher the rest of it. A good signal for this indicator with price making a higher low. It also came in conjunction with other breadth signals strengthening the reliability. Extreme pivot gives a buy signal after muddling for a month.
Percent Days is working well off last week’s signals. Now we want to see extension away from those lows. Back to back signals should be respected and are working well so far.
Summary: This week started a snapback rally off the extreme readings. I admit I was a little sanguine about the likelihood of getting these extremes on this pullback, but now that they are here, it is not time to overcompensate for the previous misstep. The major trend is still up and this week’s breadth action likely put in (or is very close to) a short term bottom that can go for a while. All long term bottoms start as short term ones, so no reason to do anything other than identify resistance points, watch price and breadth action as we go, and act accordingly. I do believe this pullback put a larger dent in the overall market structure than we have seen in a while, but it hasn’t turned the larger trend down, so don’t get ahead of yourself.
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 all curled back up with this week’s action. It is pretty clear where the leadership is and who took the biggest hits. Coming off the short term extremes we saw last week, where you are looking for opportunities has more to do with trading style than it does opportunity. Both pullback and breakout players need eyes wide open here. Energy, Utilities and Real Estate continue to lead while the only sector still showing notable damage on this measure is Health Care. Even Technology, Consumer Discretionary and Financials don’t look too damaged here.
Broad Sector Moving Average Breadth gave plenty of short term reversals on the sector level as we suggested last week. The gauge here is how much the %>50sma reacts to this rebound. If they can regain ground quickly, it will bode well. If they do not, another warning flag will be added to those flying. So far, the %>200sma are holding at adequate levels. A move back higher from here could be a good refresher for the trend as most overbought readings have been eliminated. Further weakening in sectors like Health Care, Technology and Consumer Discretionary would be sufficient to consider a larger reversal of trend may be taking play.
Broad Sector McClellan Charts saw most of the Oscillators get nice pivot lows and are now attempting to turn the Summation Indexes, but they are not there yet. Unless, of course, you are talking about Energy or Utilities which are both still running higher. Look for continued improvements in other sectors to provide support for the broad market.
Broad Sector Breadth Thrust all made pivot lows as well with about half being in the extreme zone. Look deeper into the page to see how they lined up with price on each sector.
The New High – New Low Differential moved back to the positive side in most cases this week. Health Care showed its first negative cluster since this chart began giving color to how hard it has been hit during this pullback. On the other side of the coin, the expansion in Energy and Utilities look great. Most of the rest of the sectors are muddling near the flatline while the trend searches for direction.
It was nice to see the snapback this week. The short term breadth indicators were hinting it was close, but with two false starts already, it can be hard to trust. So far so good, but it is too early to tell how much will make it back into the most oversold sectors. If we get follow through this week, watch to see if there is a rush back into momentum and high growth or if the safety plays continue to perform as well or better. If the money flow continues to be strong in the late stage sectors, it can be a longer term concern, but could take months to quarters to play out. There should be plenty of opportunities along the way. The short and intermediate breadth Indicators are hinting this could have been just another pause along the road higher so don’t be overly bearish here. The noise is always loudest near the bottom, and the larger trend is still up.
Sector Relative Strength Rankings
First, I look at the Custom Indexes and 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 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.
Markets saw a nice snapback this week, but not enough to re-arrange the relative strength rankings. The defensive sectors continue to be on top and performing well, but (other than Energy) underperformed a bit this week. That is what I was talking about above in the sector breadth. If the growth and momentum can continue to outperform off these lows and move back up the RS Lists, it will go a long way to improving the outlook and putting confidence back in the trend. From here forward is proving time for the high flyers.
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
Consumer Discretionary is one of the sectors that has taken a larger hit than many during the recent pullback. With 8 subsectors (the most of any sector), there is plenty of room for dispersion within the sector so taking a look at the Subsector breadth charts at the end is likely to be worth your time.
The Advance Decline Line lost the trend line after a couple of previous tests and is now moving for a backtest. The price action looks similar with less tests. My feelings on broken trend lines are well known. If the broken trend line can be recovered quickly, all is forgiven. I see it like a failed breakdown which can lead to a fast move. If it gets rejected, it will set up a test of the February lows. If that breaks, then we have our lower low. A low here is a higher low and should be treated accordingly.
Percent Days is showing heavy selling pressure in the last two weeks leading up to the recent lows. Multiple percent days here have signaled exhaustion in previous down moves. This one has yet to prove it, but the set up is here.
The Breadth Thrust Indicator fired it’s 3rd short term extreme, but all three are fairly shallow. The thrust off the lows is mediocre so far. If it is going to have legs, it will need to show them sooner than later.
The McClellan Indicators don’t seem to be showing the selling force either. The Oscillator doesn’t want to make an extreme and the Summation is just below zero. Now, the Summation has been waning for a while, so it may be gradually losing strength or it might just be a symptom of the grinding trend. Either way, if we can turn the Summation higher here, I will take it.
The Moving Average Breadth is often where a lot of my attention goes, and this sector is a great set up. With both the %>20sma and %>50sma turning up from below their low lines while the %>200sma holds near 50%, you have to give it a shot. Now, this can be a very powerful signal (only one better is all 3 coming up from the low line), but risk management is key as a failure might lead to a swift test of the year to date lows.
The New High – New Low Differential has seen a few negatives this year which is a big warning in itself, but as with other areas, the bears have not been able to expand them. The 10sma also ended the week negative. The first two sell signals have fired, so a good bit rides on how this reversal holds. If it fails, we will get likely get the 30sma move below zero which is the all out signal. It will be interesting to see if that comes above or below the year to date lows, if it happens at all. If we continue higher, then the count will reset shortly.
Consumer Discretionary is another hard hit sector, but as mentioned above the subsector movement is anything but correlated. Retail and Household Durables have been the hardest hit with Media & Entertainment next, but Autos, Components & Sales and Hotels, Restaurants & Leisure are both holding up well.
Since the extremes we are seeing have been short term in nature, I decided to build the MA Breadth Dashboard for this sector as well (not planning on this being a regular thing). It is worth noting how washed out they are on the short and intermediate readings. The long term readings have also taken some damage, but a few are still holding in there pretty well. Autos still look to be a leader, but the divergence in the %>20sma on Media & Entertainment is worth noting as well.
The play here in Consumer Discretionary is another oversold play. If we are still in a longer term uptrend, this would be a good spot to see some flow back into this beat up area. Below are each of the Subsectors Breadth Charts for a closer look into each.
I have also added a page with all the Broad Sector Consumer Discretionary Breadth Charts to view them in the same layout as the subsectors above.
Here are the Consumer Discretionary RS Rankings:
Subsector RS Rankings
ETF RS Rankings
The ETFs show nothing has escaped the recent weakness within the sector. Autos holding up the best. I also like the looks of Media and Entertainment at this level.
Top 40 Consumer Discretionary RS Rankings
Bottom 40 Consumer Discretionary RS Rankings
If you want to dig deeper into the Individual Consumer Discretionary 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.
First few days of the bounce are behind us, so it gets more volatile from here. Make sure you allow for some ebb and flow, but keep the leash fairly tight in case the sellers were just taking a holiday break.
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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