August 31, 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 week turned out a little more volatile than we have seen since the reversal, but the bulls still eked out a gain in the end.  It is true that the low pre-holiday participation usually adds to volatility, but it wasn’t too much.  Actually, it helped the indexes move out of overbought territory on shorter time frames which is needed if we are going to continue higher.  I believe it is also true that gauging next week’s action when many get back to work can be more important; for now though, things continue to improve from a relative strength and breadth view.  Most encouraging this week was the leadership by $IWM in the equity space as it continues to play catch up.  The non-confirmation scenario is still on the table, but no big signs of that yet.  Commodities also showed some notable action with $USO & $DBA leading the week overall.  Growth continues to lead as another pillar of this move.  This week’s low volume volatility is ideal for where the markets are right now.  Market structure looks fine as Growth is leading and equities are showing relative strength overall.

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 saw another week of New Highs handily outpacing New Lows which have all but disappeared again.  That said, absolute value of the differential is still pretty muted.  It would be nice to get some expansion…finally.

The Advance Decline Line continues to lag price a little as we near new high territory on the price weighted index.  This does increase the chance we get a divergence here, but we won’t know until after the next peak; for now, it is just lagging which is worth noting.

The McClellan Indicators are still pointing up.  The Summation has made its way back into positive territory by a hair, but continues to rise off the lows without any hesitation.   The Oscillator has been coming in some without price which is fine for now.

The Moving Average Breadth also continues to improve overall with short term readings back near high line and intermediate rising again as well.  The longer measures should play catch up if we continue.  The mature nature of the trend can make this more difficult, but only time will tell.  For now, they are pointing to broad participation.

Breadth Thrust Indicator no extremes in sight, so no message here for me right now.

Percent Days nothing new here either.

Summary:  The Custom Index price picture and breadth both improved this week as we are nearing the highs again.  With over 3,000 stocks in the index, it shows the participation is broad and has definitely been improving in recent weeks after getting pretty oversold in July.  The Indexes outside of Small Caps may not have dropped a lot, but we saw internal extremes which are often a better gauge of where we are than the cap weighted benchmarks that most follow.  The short term bounce has now led to intermediate improvement and is beginning to move the long term measures back to positive positioning.  This strength is likely to dissipate BEFORE we see any major top in the markets.

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 improvement almost across the board is supporting the move higher.  Hard to see too much weakness with most of these near their highs.

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 back in gear as well. Don’t argue until there is a reason to.  I particularly like the setup for Basic Materials right here.  The breadth has lagged this move some but looks to be positioned well going into next week.

Broad Sector McClellan Charts all continue to improve supporting the intermediate move higher here.  I don’t expect this to change on a dime, so probably have more upside to go before any larger issues.  Here I particularly like the looks of Energy setup after its recent pullback.

Broad Sector Breadth Thrust doesn’t play much of a roll at highs for me and we are no where near extremes on the downside. So, we just watch and wait…

The New High – New Low Differential perking back up on this level too, but don’t expect me to get excited until I see some long bars….in either direction.

There is nothing really to argue about on this level either; the markets are doing what they are supposed to here.  We hit extremes near the end of July that not many believed in (as usual) and now we are weeks into the next leg higher with broad participation supporting it.  It may end tomorrow, but that is where we sit today.

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 RankingsTop 30 Sector ETF RS Rankings on FINVIZ

Bottom 30 Sector ETF RS RankingsBottom 30 Sector ETF RS Rankings on FINVIZ

Summary:  Sectors continue to do their thing as money rotates around.  The most notable drop in RS was in Consumer Staples while the largest jump was Energy.   This week showed a few more red arrows, but nothing serious.  This action is what we would expect from the breadth picture above.

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:  I don’t want to belabor the message just to write more, so I won’t.  The markets are doing exactly what you would want them to do off an intermediate low. From these levels we can just as easily continue higher for a while as things improve under the hood or we could correct a bit to help setups.  Either way, not much evidence is cropping up to suggest an immediate reversal.  The longer term momentum indicators on many indexes are getting elevated, but those are longer term and take a long time to resolve.  With breadth and relative strength in our favor, as long as the shorter term indicators continue to reset from overbought readings without breaking down, we should be fully with the trend…which is solidly up at the moment.

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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