August 3, 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.
Last week we noted some chances of indigestion in Equities if we saw continued strength in $UUP and $TLT, and that is what we saw. Actually, $UUP was the only green in the Intermarket list this week, but there was still plenty of talk about $TLT even though it ended red. The Intermarket RS rankings have no real discernible structure at the moment. Large Growth is still leading in both lists, but the rest of the equity complex is all over the place. In short, it’s a mess out there right now. It is interesting though to see Growth still leading with exception of the small cap space which all got smashed last month with very little differentiation. Up until this week, most of the losses were confined to small caps, but that changed as we ended July. From a relative strength standpoint, it looks like the corrective action has taken hold and last week was a sign to be more cautious even for intermediate investors. One thing relative strength like this doesn’t really do is give clues as to how close to the end we might be. For that, we move to the Breadth work below. Looks like Small Caps were correct in correcting and have now pulled the rest of the markets into the mix. Now we wait and see if the short and sharp mantra I have discussed most of the year plays out or if summer doldrums elongate the malaise.
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 finally saw the bears expand the new lows this week for the first time in a while sending the NHNL Differential to the lowest level this year. Maybe even more important is we didn’t see an immediate snapback the next day. This gives us the fist sell signal for this indicator. The second will trigger if the 10sma goes negative and the final once the 30sma follows. Things are very tentative at the moment, but we need all three to be looking for a more major top. This is our longest term indicator and gives very few signals, so when all three line up, we need to be ready to listen…and act.
The Advance Decline Line also gave a longer term warning this week as it slashed through the trend lines we have been watching. Now we watch and see if it makes a lower low. The AdvDec Line is still in an uptrend which has been in effect the entire rally, but a lower low would paint a more bearish picture.
The McClellan Indicators were a good tell last week of continued softness. The Summation didn’t even try to hold the flatline and is now pressing on the May lows showing the intermediate picture continued to deteriorate as well. However, the Oscillator is sitting on extremes for the second time in a very short period suggesting a short term bottom is probably pretty close.
The Moving Average Breadth never saw the thrust needed, so it failed. A look at this chart shows a similar picture as above. The long term readings have deteriorated more than any other time since the rally began. The Intermediate readings are nearing extremes as they gave up last week as well. The short term readings are also about to enter the extreme zone. Any pivots higher from here give a short term signal. During that bounce, we get more evidence as to how important the deterioration in the two longer readings is going to be.
Breadth Thrust Indicator signal from two weeks ago failed as well and is now making a lower low. This is not an indicator that sees multiple extreme lows clustered too often, so any pivot from here should be taken serious from a short term perspective and then monitored for how strong the thrust off the lows is. The stronger the better for the intermediate health of the markets.
Percent Days gave us another 80% reading on Thursday, but this time it was not immediately followed by an up version. As you can see from previous 80% days (aqua), a bounce usually ensues shortly after they show up, but the reading is only valid for a few days afterward.
Summary: The Universe took another hit this week taking out some support we have been working with for a while. At the same time, the breadth picture deteriorated faster and further than we have seen so far this year. That doesn’t have to mean a larger pullback, but certainly puts us on alert for that in the Intermediate term. Much more deterioration will have us more concerned about the long term prospects. We will be watching closely this month to see how that plays out. For this week, the most important read I see is the short term extremes. These are likely to produce another bounce sooner than later. The last one was a dud, so if the bulls want a chance to right this ship, they will have to put more effort into the next one we see.
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 continued to rollover this week with the broad based weakness we saw. This is the first real weakness we have seen in this dashboard since early 2014 and should be monitored for continuation.
Broad Sector Moving Average Breadth gave us hard moves down in many sectors this week. The weakness in the %>50sma was probably the most abrupt and telling about the damage this week. That said, we are now seeing many sectors showing extremes in the short and intermediate readings, so pivots higher from here could produce a very trade-able bounce. That is all I would look for at this point, but we can’t forget that every new leg higher begins with a bounce.
Broad Sector McClellan Charts were suggesting the potential for more issues and this week followed suit. The Summation Indexes continue to fall and many are accelerating. The only two left above zero right now are Energy and Real Estate. These need to turn back up before getting aggressive on the intermediate time frame, but the short term Oscillator is painting a different picture for a few sectors. Utilities, Real Estate, Industrials, Energy, Consumer Staples and Basic Materials Oscillator readings are at definite extremes here. They can certainly diverge, but most of the time they show up at or near a trade-able bottom.
Broad Sector Breadth Thrust saw the last attempt to pivot higher fail, but now many sectors are seeing even further extreme readings. This is an indicator that has a history of diverging, but when you see moves down to the .3 zone, it is time to take notice and look for opportunities.
The New High – New Low Differential started to see some negatives crop up this week. I still believe we need more expansion before getting too concerned, but this change does have me watching much closer in the coming days to weeks.
Unfortunately, we saw boredom turn more into fear and the broad sectors took it on the chin this week. The action did hit some sectors more than other, but everyone took a whack at some point during the week. Thursday the crack and Friday could not reverse it as we have seen so many time before. It may just be the bulls regrouping over the weekend, but no matter how you look at it, they took more casualties this week. I think we are likely to see a counter attack by the bulls this week and that should help us figure out if they are back up to strength or if they need more time to recover from this week’s damage.
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.
Summary: No Broad Sectors survived this week’s selling and only 1 of the 49 Subsectors was green. The broad based selling took hold as fears rose. Technology, Health Care and Real Estate remained on the top while Energy fell pretty hard this week. I will be watching extremes this week, so those sectors and subsectors like Energy that have seen their RS fall faster than others will be on the radar.
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.
This week we are going to focus on Energy because has fallen in the rankings so quickly after being a leader for much of the year. It seems a little too far too fast for me unless there are other structural issues at hand that I am not seeing yet. The story for the sector seems to be intact, but nobody cares right now. Often, that is a great time to look for opportunities to get involved. Below is the sector breakdown:
The Advance Decline Line rolled over fairly hard in July after a very steep ascent. The month ended with a big drop forging a lower high in the AdvDec Line and price. The drop took a beeline for the last break out point from May which is now just below.
Percent Days saw a big down day in late June and then became much more frequent during July as profit taking started. Interesting to note the intensity of the readings is actually diminishing as the month went on even though price continued to fall. This is one reason I think the worst may be over sooner than later.
The Breadth Thrust Indicator shows very little selling pressure this year until this week. Friday is the lowest reading on this chart.
The McClellan Indicators is showing me a set up that looks ripe for a reversal back higher. The Summation has been on a strong dive toward the flatline while the Oscillator has been driven to the lowest level since the rally began. It could certainly come in more and/or put in a divergence off these extremes, but this looks panicky to me which is usually an opportunity.
The Moving Average Breadth is also showing that panic with only 8.3% of the 261 stocks above the 20sma and 18.6% above the 50sma while we still see 58.1% above the 200sma. This screams pullback in an uptrend.
The New High – New Low Differential is the reading that gives some pause as the NHNL went negative this week on the heavy selling. This will need to reverse quickly with any bounce. If it doesn’t, it will put the pullback idea in question and have us looking for more issues in the sector.
After leading most of the year, a pullback is fine, but now it is hitting some extremes in the broad sector as well as the subsectors that I think are worth taking note. The AdvDec Lines have rolled fairly hard in recent weeks, but the short term breadth measures are showing extremes we haven’t seen in a long time.
All of the subsector breadth charts below are showing some surprising extremes in the short term. Some more than others, but all pretty low. Take a look at how each is positioned in the links below as they can give you better context when looking for the relative strength opportunities in the next section.
O&G Integrated, Refining & Marketing
I have also added a page with all the Broad Sector Energy Breadth Charts to view them in the same layout as the subsectors above.
Here are the Energy RS Rankings:
Remember one caveat in my Energy ETF rankings is they include Solar, Coal and Uranium which are actually in other subsectors than Energy for my custom indexes. For those who would rather dig into the individual holdings, I have the top and bottom 30 RS ranked names in the broad sector below.
If you want to dig deeper into the individual Energy 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.
Final Note: I guess not worrying much last week might be seen as a failure; but there have been so many times over the last year the worries have cropped up early that I would do the same thing if I had it to do over again. Now we are sitting in a position where the deterioration is coming to fruition, but the short term readings are hitting extremes. This suggests to me that until we see some resolution to those opposing signals that less is more. That doesn’t mean you can’t get involved in a bounce if it does ensue; but it does mean you should be looking at it more skeptically and take profits quicker and keep the risk management tighter than you might at other times. I believe we will get a bounce this week or next and gauging it will be our job from here. Right now managing risk is the key to being involved and your time frame should dictate how that is implemented.
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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