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Macro Relative Strength
The intermarket picture continued to adjust this week as $UUP finally left the top spot and plummeted down to 53. Of course, that perked up commodity investors with the pinnacle being $USO where we have seen a worst to first move over the last month as it is up more than 18% over that time period. $UUP trend doesn’t have to be over long term, but it has been heavily overbought and hinting of more weakness over the last couple of weeks. I still think it can come in more before trying to find a floor, but that doesn’t really matter, it will reverse when it wants. While it is falling however, $USO and other commodities can catch some tailwinds. So far, that is not happening in $SLV, $GLD or $DBA, but they may be worth keeping an eye on if the $UUP does stay soft. At the same time, this also helped pull the Equities back into the top half of the list…almost. $DIA is smack in the middle spot, but we do have $IWM $QQQ leading equities which is good. Bonds are also slipping in the ranks without any big absolute moves. This is a function of strength in other places more than specific weakness in bonds for now, but we will be watching for clues here.
The Equity Size & Style list continues leaning Small to Large and Growth to Value which is a great structure. It is not a royal flush where they are all in perfect alignment, but the message is there. As long as this persists, it will be be a big plus for the markets as well as the economic outlook. The more comfortable investors are about the future, the more we will see flow to the growth side of the equation. The structure in both lists continues to put the weight of this evidence on the side of the trend as they show underlying strength in the right areas.
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.
If we just start at the top and look at my two custom index lists and move our eyes over to the color coded relative strength section, it is pretty easy to see the rotation over the last couple of months. Top of the list has moved from red to green (with the exception of Health Care) and the bottom of the lists did the opposite. This change did not happen overnight and we have been pointing out some of the changes along the way. However, it seems the subsectors is where the real action is right now. A handful of them were positive on the week. Mainly in Energy, but also a showing from Money Center Banks, Internet, Metals & Mining, and Precious Metals which showed they were poking around in a few other areas. On the other end, Utilities and Real Estate are now anchoring the list. I had expected that to change as $TLT improves. If these sectors are going to respond, it needs to be soon. If $TLT continues to rise and those two sectors do not, it could be trying to send us a different message than what we have become used to over the last few years and signal a change in character.
The week was going much better in other areas until Friday’s gap down that could not find any real buyers before the close. Not too much of a surprise since is was OPEX week. I always expect more volatility and at least a few odd moves during it. Early next week should give me a better gauge of Friday’s importance, but until then I still think there are opportunities to be had in this listless market. Then again, there is almost always a space that is working in the markets. The question is can we identify it early enough to get aboard and have the confidence/conviction to capitalize on it when the overall market is dragging things down around it? You can if you are well grounded in your process and methods and have a solid trade plan, you can handle what comes next, whatever that may be. My goal here is to show you the spots that look the best to fish in every week whether it is sunny out or are in the midst of a storm. I don’t tell you what reel to cast or bait to use as those are personal choices based on what type of fish you are trying to catch. Right now, there are plenty of fishing lanes open and stocked, so 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 custom index continued to climb early week only to give it all back on Friday. It matched what most of the markets did, but Friday’s action did put a dent in some of the Breadth views. It was a down day with some velocity and force, so we shouldn’t ignore it, but being OPEX Friday and adding in a few headlines to fuel things, I would rather wait until next week to pass judgement. It wouldn’t surprise me if it did turn out to be a one and done shakeout before moving higher through the resistance in the major indexes allowing them to finally break the weekly flags they have been in for more than a month. With the breadth and relative strength we are seeing, I still favor that break to be higher, but if not that will be a message in itself.
1. NHNL went slightly negative Friday, but New Lows remain anemic.
2. McClellan Summation index moved away from the signal line early week.
3. Price remains above the neckline after a breakout back test and now making new highs.
1. First 80% down day in a while and it came on the reversal day near top.
2. Advanced Decline Line couldn’t hold the trend line break.
3. MA Breadth took a decent hit on Friday putting %>20sma below 50%, but just one day, not a trend.
4. Breadth Thrust Indicator and McClellan Oscillator both took sharp hits on Friday, will watch for follow through.
Breadth chugged along early week grinding higher in most spots and then took a hit on Friday pointing all the indicators down for the day. It could be the start of something or not. We just have to wait and see who shows up this week with more vigor. Buyers or sellers?
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.
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.
Let’s keep it simple this week. There are still many sector McClellan Summation indexes that are pointing higher with many already above zero. This is still the best intermediate guide I have for the sectors and the market. With 7 of the 10 still looking decent, I wouldn’t worry too much yet. The three that are concerning are Real Estate which we have already discussed and the Consumers. Both Discretionary and Staples are seeing their Summation Indexes start to roll over. I have mentioned some concern here over recent week and feel they may need more time. They are approaching short term extremes on the Breadth Thrust, so we will want to see how they react there in case this is minor pullback in uptrends. That said, usually when you have the breadth softening along with falling relative strength measures, it is best to let it play out as there are plenty of other strong sectors to concentrate on right now. Unless of course, you want to try them from the short side. There is always a way to win in the markets if you can get general direction right. Overall, the sector world still looks pretty good after seeing some solid rotation in the recent months and is not showing signs of weakness as of yet.
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 pretty typical for OPEX from what I saw which sends me into next week still constructive overall. I would not read too much into Friday’s move yet. Some quick swings early week turning into a slow grind higher with a lot of dispersion under the surface. The Indexes ended with losses after Friday’s raid, but if you were agile and in the right fishing spots, there was plenty of opportunity to take advantage of. That seems to be the story of these markets lately. The ETF portfolios that I manage with this report had their best week ever, and I give the credit to how I utilize this data combined with my daily process you see posted on social media. I don’t expect everyone to use information the same as I do, but do hope you are finding success when including it in your process. As always, I am happy to answer any questions on the data and how I view it. Don’t forget, this is what I do everyday for clients, so if you feel I might be able to help you and your portfolio, shoot me an inquiry on my Managed Assets tab and we can discuss more specifically how I tactically manage my client portfolios.
Have a great week!
G. Thomas Lackey Jr, CMT CFP® CFS
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