April 26, 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
Another week gone by and the Intermarket picture continued to improve for equity players. $USO is still leading, but all of the Equity indexes are now back in the top half with $QQQ posting a big week as earnings were received much better than many expected. $UUP continued to move down the ranks a couple of notches, which supports the $USO positioning, but makes the $GLD $SLV positions at the bottom interesting to say the least. The structure here is still pretty scattered, but trying to shore up a bit it seems.
The Size & Style rankings continue to scream growth. With a 4% week, it is no wonder Large Cap Growth moved to the top, but overall this shows the underlying risk appetite is going strong even with the fits and starts we have been seeing. We do like the optimal rankings to be Small to Large and Growth to Value, but small deviations like this week are perfectly acceptable to me. As stated above, the Intermarket RS rankings are a little messy, but structurally positive with Equities in the top half and improving and the $UUP moving back towards the middle. Couple that with the continued positive leaning of the Size & Style and we are still in a good spot for the markets going into this week.
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
I continue to see this as a time to play in the subsectors more than anything else. Some will do that by drilling down and finding the best stocks within those subsectors while others can use the more focused ETFs if they are looking to catch the trend of the move. I know we all want to pick the leaders in leading sectors, but for some it is just not worth the extra that comes with that endeavor, especially if they can get a big chunk of the gains with less risk all in 1 shot. Many Technology spaces stood out this week like Internet, Software & Svc, Telecom & Wireless. Consumer Discretionary saw most of its subsectors shine and there were a few more random areas like Industrials subsector, Transportation and Basic Materials component, Industrial Metals & Mining. This is not a total list, but you can see, other than a few broad themes, there was a spot in most sectors that performed pretty well. The fishing lanes are still broad and stocked as we enter next week.
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
The markets responded well to last Friday’s shake out by grinding higher most of this week. This helped improve the breadth measures keeping them from forming any type of bearish structures.
Positives:
1. NHNL came back positive and expanded 2nd half of the week.
2. McClellan Summation avoided the cross and is pointing higher again.
3. 80% down day last Friday met with a quick move back higher negating it.
4. Price made new marginal and closing highs again this week.
Concerns:
1. MA Breadth recovered this week, but not making new highs in any of the 3 measures.
2. Advance Decline Line snapped back well, but needs to make new highs to confirm price move at some point.
After last Friday’s selloff, breadth grinded its way back higher this week along with the price structure as my price weighed universe closed at new highs. This supports a continuation of the move higher even if it feels as listless as it did last week.
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
There are a lot of sectors out there that still look great on a breadth level. Just looking at the top chart showing the Advance Decline Lines you can see the only two not playing along are Basic Materials and Energy. Of those two, Energy has improved more, but with the $UUP weakness I would be hesitant to bet against either at the moment. That said, Precious Metals continues to be a huge drag on Basic Materials. Real Estate has been a laggard, but combining the current positioning of the McClellan Oscillator with the thrustiness of the Breadth Thrust Indicator, it continues to have my interest for a rebound. So far, the Advance Decline Line or NHNL Differential have not signaled any real danger, so I am looking at it as a pullback rather than a rollover still. Another sector that looks ready again based on both breadth and price patterns is Consumer Discretionary which would certainly bode well if it ended the recent rest soon. Rotation like many other market concepts can occur on different magnitudes and timeframes. Some rotations are just to give a short term break to a hot sector while others usher in a complete reversal of a particular trend. Monitoring them with this knowledge can help measure the implications as we move through the constant waves of the markets.
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 market responded well to the OPEX shakeout we saw the previous week. This shows the risk appetite is still thriving with all of the back and forth and noise about a tired market we hear about constantly. Remember everyone has a different timeframe and a tired market to a day trader does not even register on position trader’s radar. The market structure looks fine and even improved some this week on both the Relative Strength and Breadth fronts and none of the major Indexes are in overbought territory on the daily or weekly RSI charts; all of which should support a continued move away from the breakouts in the coming weeks.
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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