August 24, 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 buyers showed up again early this week and pushed higher through most of it. This is the type of follow through I suggested last week was needed, but honestly felt it would take a bit longer to materialize. The strength was there as $QQQ and $SPY made new highs, $DIA is right there tapping on the ceiling and $IWM reclaimed and closed above the 50sma. Hard to see a whole lot of negative out of this action which moved equities back into 4 of the top 5 spots on the Intermarket list. I would say if there was a clue here it was the Equity Size & Style being so growth focused over the recent weeks. It is just hard to imagine a large correction when growth is working so well. One thing to keep in mind is we are now back in the non-confirmation position by $IWM, so a failure here should be watched closely. A small pullback is not a failure with this setup, but if small caps start lagging badly here, I would be watching for a retest of the lows there and some breakout tests in the others. Right now the action doesn’t suggest it, but it is always good to have alternative scenarios in mind in case your first one doesn’t play out. The follow through we saw this week was important and suggests the bulls are back in charge for now, but I would not rule out continued volatility as we wind down the summer. We now have another higher low to work against along with some new higher highs and the Relative Strength structure that favors stronger equity markets.
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 remained positive all week even though it did taper off toward the end. That is okay as some ebb and flow is necessary. On the good side, it was enough to turn the 10sma back positive starting the signal count over and we are right back testing these down trend lines on the indicators. A breakthrough would definitely be welcome. Expansion is key, bears couldn’t do it, now it is the bulls turn to try.
The Advance Decline Line continued to move higher this week as well, but seems to be stalling some. That coincides with the small cap waffling we saw. The AdvDec Line is lagging price a bit as well which is not extremely unusual off of lows, but still should be monitored in a mature market like we have.
The McClellan Indicators still have a large portion of my attention at the moment. The improvement in the Summation index is notable to say the least and I expect it to continue. I did hear a good bit this week about the Oscillator getting overbought. It is nearing highs, but one needs to realize that the high in the Oscillator almost NEVER corresponds with the price high of the move. The Oscillator usually goes to it’s highs on the initial thrusting move and then diverges for a while before price ultimately peaks. This is why once we have a solid reversal we turn our attention to the Summation Index until it begins to show weakness again. Only very short term players should spend a lot of time worrying about Oscillator fluctuations outside of extreme oversold conditions.
The Moving Average Breadth is also leaning higher here after the last reversal. The %>20sma is back into levels denoting market strength while the other two are over 50% as well. However, the %>50sma reading needs to put some distance between it and the midway mark. The %>200sma is also in decent but not great shape. So no reason to call a top, but giving us more evidence of a maturing trend where it is harder to keep these longer term measures up in the top zones.
Breadth Thrust Indicator rolled over this week, but don’t really care. Remember, this is a bottom indicator for me which I mostly ignore near highs. Similar to the McClellan Oscillator, it has too many divergences off the highs to be a good sell indicator. One correction from last week: I said it needed to get back near .80, but that should have been .60 which we almost reached this week.
Percent Days were a part of this week. Monday we had an 80% up day which shows some conviction and is good to see, but doesn’t have the significance of those on the downside.
Summary: Small caps sideways action kept the numbers somewhat in check, but most all measures improved some for the week and continue to point higher. I will continue to focus on the McClellan Summation for intermediate strength unless it fails below zero which then would suggest a retest of the recent lows in the universe.
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. 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 continues to support the uptrend almost unanimously. If there was a laggard to note, it would be the Basic Materials sector having some issues with the commodity cool off we have been seeing. I would also like to note how close Financials are to making new highs. Many have discussed this sector as a laggard; that might be about to change which would be a great rotation to help the trend if it wants to continue higher.
Also, check out this subsector view I created to dig a little deeper into where participation is moving to and from.
Broad Sector Moving Average Breadth are also supporting the move higher in most areas. The %>50sma readings are still neutral in most, so a sharp eye is still needed in case we don’t see more improvement here. %>20sma got this started, but now we need to see expansion in the intermediate measures to solidify this leg.
Broad Sector McClellan Charts gave us the clues last week and solidified the turns in the Summation Indexes this week. This is very positive action for sectors and the broad market in my book.
Broad Sector Breadth Thrust has done its job and is now on the back burner. The thrusts were strong enough to confirm the reversals, so now we sit back and wait for the next extreme while following our intermediate and long term indicators.
The New High – New Low Differential are shaping up without ever getting notable downside expansion from any sectors. All of the 10sma readings are also back in positive territory with last week’s strength.
The follow through in the broad markets trickled down to broad participation in the sectors as well. This type of action is what we would expect off the extremes we saw in recent weeks. It made for some profitable moves for those paying attention, and should have taken some longer term investors off the ledge for now.
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 (or here), 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: Sectors did not see a lot of movement in the relative strength rankings as the participation was broad. There was more rotation in the subsector level, so taking an extra minute on that list would be worthwhile. The most interesting to me are the moves in the Consumer Discretionary area which had the largest moves in both directions. Either way, there still seems to be good rotation and new opportunities cropping up every week for those willing to follow the action.
I have decided not to do the sector highlight each week at this point. I plan to do one here and there if something really jumps out at me, but for now I believe the report has enough depth to greatly focus your research to the right markets and sectors. This should save a good bit of time and allow you more time to ferret out the specific names you want to stalk.
Final Note: This week’s follow through was welcome and should provide some support for the bulls to push further, but it doesn’t have to be in a straight line. Some shakeout or volatility would be good to keep people on their toes, but is still likely to be short and sharp in my view. Using these pullbacks as buying opportunities as long as the McClellan Oscillator remains constructive is probably the best game plan for those who didn’t buy in the last two weeks. I don’t expect us to get into a lockout rally during late August and September, so be patient and you will get your shots.
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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