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If you just want the highlights for now, check out the Executive Summary.
Macro Relative Strength
Intermarket Relative Strength didn’t improve this week for the equity markets. $SPY held its position and $DIA actually climbed one spot, but $IWM $QQQ both fell to the bottom of the list. This week did not provide any follow through to last week’s reversal. Until equities move back up in the top half of this list, the warning flags continue to fly. Even though we didn’t get follow through, we also didn’t engulf those weeks which is a small positive. The ultimate test will be the recent lows and how we react there, if we get there. Equities back in the penalty box and continue to fly yellow caution flags. Red flags come out if the lows fail this week.
Equity Size & Style Rankings also continue to warn of market worries. The value indexes have been on top for a month now and are starting to settle in and get comfortable. Don’t forget you can click on the table and see rankings segmented by size. Without follow through on last week’s bounce, we didn’t see much change here at all.
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 spent the first half of the week holding up well and succeeding in curling the 20sma back higher before it gave up. Wednesday, it started fading a bit as the markets stalled, then on Friday it fell back to a -2. Another negative is not ideal here, but not all that surprising with the chop we have had. The real message will be in if it expands and turns the 10sma negative next week. Turned slightly negative Friday as markets sold off. This has us alert, but still waiting for the MAs to signal before getting more bearish.
The Advance Decline Line continues to dance with the trend lines. The AD Line is holding up better than price itself at this point showing one of the characteristics of a price weighted index like mine. Many of the stocks getting hit have been high price per share names like $GOOGL $PCLN $AMZN $CMG $ISRG etc, which have higher weightings. But since it is price that pays, in the short term, that is what we feel the most. This shows the chop we have been seeing around the markets, but is still holding near highs from a longer term perspective. Participation remains solid from a longer perspective, but doesn’t make the short term feel any better. Needs to break the AD trend lines for 1st warning here. Of course, if it turns up and makes new highs, you need to respect that.
The McClellan Indicators are giving us a hint things might not be as bad as they felt to end the week. Now, don’t get me wrong, this is not the bastion of strength, but the Summation Index did turn up and cross this week. So far, these crosses have a very good success ratio as shown by the green arrows. The rub is it turned back under the flatline. If we can get back above zero before taking out the recent lows, it will be a big positive from a breadth standpoint. The Oscillator is coming off its highs quickly, which tells me it might chop around for a bit here in the middle. Summation Index cross this week is a good start, but needs to get over the flatline for the final confirmation.
The Moving Average Breadth after last week’s buy signal, this week’s breadth pivot is not a welcome event. The %>50sma turning down at 50% raises the hair on the back of my neck a bit. Looking right now like a retest in the indicators are in order which can quickly bring new lows in price if it wants. The potential to set up divergences is there, but no way to know how far price will fall before getting there. It will take early strength next week to set this right. From a positive buy signal last week to gauging the warning of its potential failure at the moment. The signal can still work, but will need solid strength early in the week to right the ship.
Breadth Thrust Indicator formed a pivot high with price at a lower high which is never what you want to see, but remember I use this indicator for bottoms almost exclusively; tops with this are too messy with strings of divergences often forming. Extreme pivot buy signal played out well, now just watching until it gives us another shot.
Percent Days have been quiet since the back to back signals, but I still believe those were notable. They are best for short term bounces, so at this point they could be played out. Back to back signals worked off the lows in short term, still to be seen if it is a more durable bottom as in the past or not.
Summary: The week began with continuation of last week’s reversal, but could not hold those gains through the end. The weakness showed up mainly on Friday and some Thursday as geopolitical tensions rose again. We need a quick reversal back higher early week or we will test and likely break the lows. If we do break the lows, it will be interesting to see how much traction the bears can get this time. I hear a lot about a major Head and Shoulders top forming in major indexes which doesn’t show here. One thing that does show here though is the potential for an Inverse Head and Shoulders if we do get that early week strength. That said, the bears have the best shot they have had in a while to gain some traction. We need to have an open mind and realize how important the message is either way. If they get that traction, it will be the first time in years and we should respect it. If they fail to seize the day (again), then we should see test the highs very quickly. I am doing my best to not bias which side will win…it is hard to do, but if we can we will be better suited to react when needed.
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 continue to waffle around the last few weeks with the exception of Utilities which won’t stop. Health Care is not improving much and now looks like it might want a new low. All in all, they are still holding up well, but getting more volatile with the markets. Volatility is not where our message comes from here, direction is and only a few have had clear direction for 2 months now. As a longer term view, this doesn’t look dire at the moment.
Broad Sector Moving Average Breadth have quite a few sectors showing both the %>20sma and %>50sma rolling over at or below 50%. This is a short term red flag. In a healthy market, the %>20sma will run back higher after a buy signal. The %>200sma are still holding up pretty well, but that can change quickly if we see a failure here. I am leaving the first couple of days this week to see if this turns out to be a shake out, but not holding my breath.
Broad Sector McClellan Charts are more mixed this week. Probably the one bit of light still glimmering. Many of the Oscillators turned up early in the week and crossed higher while the Oscillators made decent thrusts. This quick rollover is not great and has crooked a few of the Summation Indexes back down, but not negated yet. Failure here would be another notch for the bears.
Broad Sector Breadth Thrust have had their pivots and put in decent thrusts here as well, but at this point we wait for the next set of extremes. I prefer those extremes to come later, not sooner. Another set right here would smell of a larger correction in the coming months.
The New High – New Low Differential still showing Utilities and Energy have been the place to be while the rest are not doing a whole lot right now. There are no big flags here this week, but I will point out the small spike in Technology to the negative on Friday. This is the worst reading in Technology on the chart. More expansion to the downside is needed in these sector readings for a major top to be suspected.
We saw some follow through early in the week only to be thwarted in the end. The momentum stocks continued to be distributed in what is becoming a larger issue. This week Technology took more of the brunt than Health Care. That is not the kind of rotation we want to see for better markets. That said, it is remaining pretty orderly and not showing that many extremes. The markets were not really down that much on the week, but the fact it happened so close to the low pivots and that momentum sectors took more of the brunt is worrisome action. It felt much worse than it looked. The flipside of that is areas like the McClellan Summation that have been pretty reliable are still hinting we might not be done just yet. I am a big fan of the Summation Index, but there is a good bit more evidence lined up on the other side that wants at least a re-test and possibly lower prices. This weekend’s data has done a good job moving me further to the cautious side which I have been reluctant to join. I have to admit, there is still something in me that says not yet, but the data shows any further weakness from here should silence that.
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) under-performed 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 was last week, so I thought we would go opposite and look at Consumer Staples this week. The Staples have been performing much better in this environment which is good for those invested there, but not normally as good for the overall markets. Consumer Staples is one of the smaller sectors, but still a decent segmentation that can help further focus where the money is flowing.
The Advance Decline Line has held very strong during the last few months, but not really making much progress showing the battle we are seeing even in this defensive space.
Percent Days is not one I want to concentrate on here with such a small sector. That said, this did get a couple of nice readings off the bottom, but the extremes to the downside came back in January on this sector.
The Breadth Thrust Indicator hasn’t made it anywhere near an extreme since January showing they are not letting it dip far before stepping in with some buying.
The McClellan Indicators are also showing any weakness is being met with buying to support the sector. The Summation Index has been drifting down, but remains well above zero and is trying to cross up again this week.
The Moving Average Breadth held up relatively well in the recent weakness as it never made it down to extremes. The one issue I have is it didn’t really see any advantage on that in the bounce last week. Actually, it looked fairly muted. We need to keep in mind that even though this is defensive and should show relative strength, that doesn’t mean it will show absolute strength (positive returns) if the markets come in further.
The New High – New Low Differential has remained positive since hitting its extremes in the January drop. What you want to see is expansion in this indicator on any breakout in price, but it is just kind of plodding along right now.
Consumer Staples has not been hit as hard since the January bottom, but also has yet to break out. If the markets want to have more of a sideways time correction, then I would expect this sector might be the next to breakout. With Energy and Utilities already gone, money flowing into this sector could be a sign we will have more of a pause for the summer than a major rollover. If we do see a major correction, remember this may show relative strength and still lose you money.
Decent strength showing in the AD Lines and below are each of the Subsector’s Breadth Charts for a closer look into each.
I have also added a page with all the Broad Sector Consumer Staples Breadth Charts to view them in the same layout as the subsectors above.
Here are the Consumer Staples RS Rankings:
Personal Products has come up off the bottom recently. The Retailing aspect hasn’t fared as well.
If you want to dig deeper into the Individual Consumer Staples RS Rankings by broad sector and subsectors, they are here with FINVIZ links for easy chart review. Note larger Subsectors do not expand well for better viewing, so for those lists 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.
As of the end of the week, the bounce looks to be trying to fail. It’s not dead yet, but will need early strength the coming week to help resuscitate it and give the markets one more shot before the Summer slow down officially arrives.
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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