*If you are not on the email list and would like to review the full report each week, please email me at email@example.com and I will add you to the beta list. Please include your Stocktwits or Twitter handle in the email if you have one. You will receive a weekly email with the password to log in to the report and any updates there are during the week. I do not share your email with anyone at any time.*
If you just want the highlights for now, check out the Executive Summary.
Macro Relative Strength
Intermarket Relative Strength remains in a cautious set up this week with Equities scattered throughout the ranking. That said, the $SPY and $DIA were able to improve their rankings and all equity indexes showed slight gains on the week except the $QQQ. Those gains might not have shown the real picture as the week started off solid and then was thwarted at the end. If that is the bounce I need to gauge from, it is failing miserably. Failing, but not dead yet. $QQQ is the index to close on new lows for the move. As usual, the markets are not going to make it easy and where they closed makes it hard to form conclusions, but, on Friday, the bears showed they are ready for a fight this time around and they are close to winning the battle. It will take time to see if they win the war. Mixed message as some Equities moved up the RS list, but the sell off on Friday should have us all on alert that we are sitting on the cusp of the bigger correction everyone has been looking for the last 2 years. Caution is still high and probably deserves to be a little higher after this week until we see a solid reversal pattern back higher.
Equity Size & Style Rankings is still heavily weighted to the value side of things which seems to be more important than size right now. The shift over the last few weeks is a normal flight to safety during consolidations and corrections. The fact it is coming so near the highs has me wondering how much sentiment is playing a role. Either way, it should have been steering you more toward value in recent weeks. I am not sure if the switch so high in the averages is a larger sign of worry or just a rotation to more stable names with solid earnings just in case. 8 of the 10 ETFs on this list were up this week showing continued participation. There are plenty of places still making money, just not the growth names that usually lead us higher. Still not a set up to be aggressive buyers as the structure here remains cautious as well. Cautious does not mean no opportunities; just stick with more stodgy names as they seem to continue to be on the march while Growth gets taken to the woodshed. Admittedly, I will however be looking for short term capitulation in those growth names very soon as they are getting stretched short term.
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 expanded nicely through the first half of the week and then stalled into the end. Actually, we should be very happy with a “stall.” I consider it a positive we did not go back into negative territory Friday with the ugly sell off. Many names gave up the majority of their bounces for the week on Friday, but not enough for us to get a negative reading. That might be worth making note of as we move forward. No signals this week and worth noting Friday’s action did not take the indicator negative which is a bigger deal after two negatives last week.
The Advance Decline Line like the rest improved to start the week only to get turned down at the end; and it did so just below new highs. This chart interestingly shows a positive divergence in the AD Line at the mid week highs. One reason is my custom index is price weighted and many of the high price stocks took larger hits this week, but it also could be signaling the internal strength longer term is still there. Remains pretty solid in light of the recent action, but doesn’t guide much in the short term until it starts breaking lines.
The McClellan Indicators are waffling right now. The Summation Index curled up above zero this week as the markets improved, but couldn’t get the cross. It either needs to cross back higher or start moving aggressively below zero for a good signal. The oscillator is hanging out in the middle here not helping much. The fact that the oscillator did not take a bigger hit on Friday also has my attention. It seemed like a pretty aggressive sell off for this indicator move. We may be setting up for a divergence here, so keep a close eye on any lower lows we make in case they reverse quickly. Summation is still above zero, but couldn’t cross back higher this week. A run below zero brings much more concern. The Oscillator on the other hand is setting up a potential divergence if we get new lows and the bears lose their grip. Both bearish and bullish setups should have equal weighting at this point.
The Moving Average Breadth put in a low pivot and ran higher early, then reversed with everything else. Worth noting here again we see the beginnings of a potential divergence in the short term readings, but potential divergences can disappear quickly, so don’t front run them. The Intermediate and Long term measures have not deteriorated much and agree with the NHNL and AD Lines that long term structural damage is not showing yet. If that was all the bounce we get, then it could get uglier short term, but not seeing a need for long term investors to change course. Possible short term divergences could also be a clue we are closer to the end than the beginning of this pullback.
Breadth Thrust Indicator is very similar to most of what we spoke of above, but here again, the reaction to Friday’s shellacking seems muted. I am not sure what that means, but very interested to find out. I would prefer we don’t see an extreme here; but, if so, it is still an extreme and a potential buy zone in the short term. How far it goes from there is the hard part to assess at this point. Last week’s pivot made it a little further but not impressive; however, the fall Friday seemed muted when compared to the price move, so be ready for a divergence if it forms.
Percent Days did not give any signals this week even with Friday’s move. Yes, the move retraced most of the bounce, but not all, so it could still be a retest. No additional signals this week. The two signals are okay and are still officially working at this point, but once we get to four in a short period, I get more worried.
Summary: It still feels bad out there with Growth and Momentum taking another big blow after a tepid bounce. The surprise is that the rest of the markets didn’t seem to go with them. Instead, they rotated to old and stodgy names that have earnings and high dividends. That is not good for high speed investing, but not terrible for the broader markets longer term. Short term, Friday’s move has us all on alert for more follow through to the downside. The breadth picture has room for that without totally throwing in the towel, but it is hard to gauge the effects of the sentiment damage we have endured over the last few weeks. The more sentiment damage that has been sustained, the more likely we continue to sell off early week, but that would also bring us to extremes which usually become good buying opportunities. I would say to take it slow and see how things unfold early before making any big bets, but I am weary of making big decisions on early weakness with many of the short term breadth indicators not reacting much Friday.
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. 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 has narrowed the list of strong laggards to Health Care and Technology. The rest of the sectors seem to be hanging in pretty well. Unfortunately, those two sectors make up a large chunk of the overall markets and that is showing right now.
Broad Sector Moving Average Breadth showed some pretty good early bounces off the extreme levels and now they are getting tested. I would say most held up pretty well on Friday with the sell off. Of course, Utilities and Energy are rocking at this point (last week was a good one to highlight Energy). The not so good part is the simple fact they did not roll on Friday at all. I would prefer to see the 20sma readings all run back through the 50% line and that was thwarted.
Broad Sector McClellan Charts showed many of the Summation Indexes curling back up this week at or above zero after a few weeks of caution. Not a clear signal, but a sign of improvement. Here again, the two showing the most damage are Health Care and Technology, and even Technology is trying to curl up at the flatline. It leaves the door open for buyers to show back up here soon or for an epic fail. I would love to be able to tell you which is more likely, but that is not the nature of markets. However, the larger trend is still up and the damage here so far is contained.
Broad Sector Breadth Thrust ran higher and then got smacked. Not falling as fast as you might think with the price action. Maybe we do have to see deeper extremes before buyers come back in here, but that is still to be seen and any divergences here on the next pivot low would be a good sign. I would still prefer if we didn’t see those deeper extremes yet as it would show more cracks in the larger structure.
The New High – New Low Differential is still holding up relatively well among all the noise. 4 of 10 had a negative reading on Friday, but none seem to be expanding much. Again, Technology and Health Care were the anchors and were giving the biggest warnings, but also getting the most oversold on other measures at the same time. Expansion on the negative side is the key, and we don’t have that yet.
Longer term indicators are still holding well, while Intermediate ones showed some slight improvements this week. The shorter term indicators are getting whipped around as both sides battle for control. The damage seems to be fairly focused in the high flyers, but we need to be diligent and make sure it doesn’t spread this week. Friday’s action rightfully put many on the edge of their seats and could have been the signal needed for a larger correction (finally); but, if Friday turns out to be a bear raid that capitulated the weak hands, we could see a swift reversal catching most off guard this week. If you are fast and nimble, you can play either direction, but there is also nothing wrong with deciding to sit it out until things clear up a bit. There is always another opportunity, so stick to the ones you have conviction with. Right now, I see the warnings, but just don’t have conviction to sell heavily or short a lot based on the internals still holding up pretty well. However, I am pretty good at maneuvering if necessary and I may have to soon.
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.
Defensives continue to hold the top spots which is a caution in itself, but still leaves opportunities if you follow the strength. The last few weeks we have talked about many of the opportunities in Utilities and Energy. This week we are going to discuss the state of the Real Estate Sector which continues to perform well, even in the face of the tapering process by the FED. Another interesting note is how well Health Care continues to hold in the rankings which is mainly due to the strength early this year. Many smart people are talking about an outright bubble bursting in this sector which could certainly be happening, but I am reluctant to go there. A larger retrace may be in the works, but with it still having a 4%+ performance over the last quarter even with the sell off and the deeply oversold readings in many individual names, I feel the panic is getting overdone here.
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
We began the year with the Real Estate Sector in the January 5th Strength In Numbers Report. It ran hard off the bottom and consolidated most of March. Now seems like a good time to revisit as it looks to be getting a second wind here. It is not a huge sector, so let’s dive right in and see what we can find.
The Advance Decline Line Moved sideways most of March until the end when it perked back up. The sector has held very well during the recent weakness, especially in light of the FED suggesting they will end asset purchases later this year. First thought is that would have been a big negative for the industry, but the charts haven’t reacted that way. When charts don’t react the way people expect them to, we should take notice.
Percent Days the indicator itself is not showing much as is usually the case with smaller sectors like this, but if you can get over all the tails, the candle action here looks very constructive. A consolidation here under the February highs which also align with the rebound highs from last July. If we can get over this level, a run to the May peak looks to be in the cards.
The Breadth Thrust Indicator is not showing much selling pressure at all during this consolidation. Buyers are showing up on each dip.
The McClellan Indicators are solid here as well. The Summation ran hard to start the year and has drifted back some during this consolidation. Currently, it is attempting to cross back higher well above zero. The Oscillator remains in consolidation mode, but buyers don’t seem to want to let it hit extremes here on any sell offs either.
The Moving Average Breadth gave a recent buy signal with 20sma turning back up from below the 20% line while the 50sma and 200sma readings held strong. One of my favorite signals and remains valid.
The New High – New Low Differential remains pretty benign, but I expect to see it start kicking higher if we get a break higher from this consolidation as more names get attention.
Real Estate has been running in the face of calls for higher interest rates all year. I said it back then and continue to believe interest rates will remain in check most of this year and probably some of the next. These charts tend to agree with me, and until that changes, have more of the taper tantrum from last spring to retrace.
I see this as a great position. We know we still have many names that are below their 52 week highs with these Subsector AD Lines all in contained consolidations in solid larger uptrends. Retail & Hospitality already has an AD Line in new high territory. Below you can dig deeper into each Subsectors breadth charts.
I have also added a page with all the Broad Sector Real Estate Breadth Charts to view them in the same layout as the subsectors above.
Here are the Real Estate RS Rankings:
Solid showing so far this year (in a flat market) no matter how you slice it or dice it. The week wasn’t too shabby either.
If you want to dig deeper into the Individual Real Estate RS Rankings by broad sector and subsectors, they are here with FINVIZ links for easy chart review. You may be surprised what you can find.
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)
The information set forth herein was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy. Neither the information, nor any opinion expressed, constitutes a solicitation by us of the purchase or sale of any securities or commodities.
There is no guarantee that the views expressed in this communication will become reality.
Investing in the stock or bond markets involves risk and potential loss of principal. Investment strategies should be thoroughly vetted and discussed with a financial advisor prior to implementing.