August 10, 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 be read here.
Macro Relative Strength
Click on either table for a deeper view including the Top and Bottom 20 ranked Broad Equity ETF and FINVIZ links.
The whippy action this week left the same three at the top of the Intermarket rankings with $QQQ continuing to lead and $UUP & $TLT right behind. Having those two nipping at the leaders toes is not the best alignment for the equity markets, but the 4th place on the list was a bit of a surprise. $IWM made a big move from near the bottom to the 4th spot from the top with its outperformance this week. If you look at an $IWM chart, it doesn’t exactly paint the picture of strength and might even be a bear flag, but it did stabilize this week and fought off a few formidable attacks by the bears. I would consider it a slight positive, but the structure here has a lot of work to do before getting comfortable with equities again. The real bright spot is the Equity Size & Style list which clearly shows growth names are holding up the best and leading while value is near the bottom. This is not the normal look for markets that are about to take a dive. It is a good sign the bears could not expand on last week’s selling and an even better sign that growth has a solid foothold at the top of the rankings. The bounce started, now we gather evidence to see if it has legs or is just a brief rest for the correction camp.
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 is still leaning to the negative side, but is a mixed bag when it is all said and done. The indicator did remain negative the entire week which finally pulled the 10sma negative giving us two of the three signals needed to confirm a larger downturn. This certainly has the longer term picture in focus, but there are a couple of things we should note that might favor the bulls. The first thing is the fact that even though it was negative, we didn’t get any expansion this week showing the bears didn’t have enough left to drive things home. This formed a slight divergence between the NHNL and price as price did make a new low for the move this week with less new lows in the universe. This is worth keeping an eye on as it might signal a bottom if the bears can’t press this week.
The Advance Decline Line stabilized as well after breaking through the trend lines last week. This allowed it to hold the basic uptrend of higher highs and higher lows for another week. You can see that price also seems to be bouncing off a shorter trendline marking the lows so far in 2014. This longer term indicator is also sitting on the fence at the moment. A lower low on the AdvDec Line would put the longer term trend much more in question especially with the softness in the NHNL above.
The McClellan Indicators have been right on the money so far in this pullback. I probably should have listened better, but now we are starting to see characteristics of a trade-able bottom in the Oscillator and other breadth measures. The indicator extreme followed by a sharp divergence to a slightly lower low in price often shows up at or near pivot lows. We still need the Summation to turn before getting excited, but that will take a minute. This is the piece of info we will be gauging if the markets can continue to rebound this week. Reversals in the Summation Index in negative territory (green arrows) have a pretty solid track record of being near lows.
The Moving Average Breadth saw the %>50sma and %>200sma move mostly sideways this week which is the best we could (should) ask for, but it was the shorter term reading that has my attention. The %>20sma flashed a short and stark divergence at the signal line this week. These small messages the markets give us can have big results if they get going. Of course, they don’t all work, but I will certainly be paying attention.
Breadth Thrust Indicator is now showing some thrust after the second extreme in a few weeks. More importantly, it is also giving its own short and sharp divergence along the trip. This helps confirm the change we have seen in the other short term measures. How strong the thrust is from here will be our clue on this one.
Percent Days didn’t do much this week, and the one from last week is not showing much reflexivity. I consider this a slight negative in opposition to the other short term positive divergences we saw. It hasn’t really failed, but running out of time for us to think it had any effect.
Summary: We are seeing one of those odd structures where the markets have performed poorly enough to weigh heavily on the intermediate breadth indicators and are beginning to put the longer term ones on watch for reversal; but we also see the short term indicators giving very positive short term signals. This could just turn into a retracement bounce, but every new leg starts off as a bounce. And, with the Intermediate indicators now oversold and the longer term that haven’t totally rolled over, if the trend wants to continue, it could certainly do it from here. These are the markets, so anything can happen from here. A hard fail off of this set up would likely send us south quickly.
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. For the first three indicators below, if you click on each respective title or the Dashboard, it will take you to a page specifically for those sector breadth charts. I did not include pages for the Breadth Thrust or NHNL this week.
Broad Sector Advance Decline Line saw a few reversals and many sectors stabilizing with this week’s action. You can pick your poison based on your style, but these do need to improve along with price if we are to see anything more than a relief bounce.
Broad Sector Moving Average Breadth readings are showing a lot of short and intermediate signals this week with quite a few showing short term divergences. Utilities are a good example of short and intermediate readings washed out while the long term broke 50% but reclaimed it immediately. Any continuation in that sector this week is worth a look. If you click through to the sector page here, you can review each sector chart as to find others that look promising.
Broad Sector McClellan Charts are similar to the Universe chart above. Most of the Summation Indexes are still falling fairly hard, but the Oscillators are showing signs of downside exhaustion. The divergences from extremes here are what particularly have my attention. If the Summations start turning, it should lead to some promising results.
Broad Sector Breadth Thrust are also looking more promising this week. We not only saw more sectors find extremes, we are also seeing more upside thrusting action including many divergences in this week’s action. Usually signals like this have short term power which could be in the offing, but that is about it. After a week or so, the broader breadth action will need to take the baton or the markets will flounder.
The New High – New Low Differential more negatives here, but nothing very notable yet. Expansion is key to either side at this point as we have been hanging around the flatline in most places for most of the year.
I see this week as more positive than negative on a short to intermediate basis with no strong long term message at the moment. Basically, don’t read too much into the pullback yet. The short term picture suggests the bounce is likely here and should last a few days to a couple of weeks. That is where we can gauge where it goes from there. If you have been waiting for a pullback to get involved, here is a good place to look for opportunities with tight risk management. The past few times we were here, the bulls stepped up and took us back to the highs. Many believe that won’t happen this time. I don’t know if it will or not, but I do know there will be clues in the action we see as the market retraces. That is the best we can do. Anyone who tells you they know how this will end up is not someone I would want to put too much weight in.
Sector Relative Strength Rankings
First, I look at the Custom Indexes and see what they are telling us on a price weighted basis. Click on either chart for a deeper view.
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, it will take you to a page that will go much deeper into the Sector ETF Relative Strength world including the Top and Bottom 30 ranked Sector ETF and FINVIZ links (added below this week).
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
Summary: Sector world still looks pretty good with Health Care and Technology leading as growth areas in the economy. It is also good to see Consumer Discretionary begin to improve showing investors are getting a little more positive on the overall picture even in the throes of this pullback.
Also, check out this subsector view I created to show where participation is moving to and from. This is where the most focused ideas will come from.
Final Note: We saw a good bit of stabilizing this week with a few reversals in the mix. It didn’t feel like there was that much positive, but the Small Caps led this week for the first time in a while helping post breadth readings that might be hinting at something different. These being short term only give a limited window of potential, but we have to start somewhere. If they fail again this time, it will likely be a sharp move lower so make sure if you participate you are ready for that. I am constructive on the coming week and will give mid-week updates if I see anything significant develop in the breadth numbers.
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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