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Macro Relative Strength
Very few safe havens this week. It is a little ironic that other than $JJC, the only other green on the Intermarket RS list came from bonds. $USO lost support and fell hard dragging others with it. Large Caps bounced around most of the week near support while $IWM was weak until Friday when they all gave way quickly. The $IWM weakness caused it to lose a good bit of RS ground this week on both lists. The week ended with Ugly weekly candles for all the major equities. This price action forces us to be on the defensive and puts somewhat of a damper on the Santa rally, but as we will see below, some extremes were also forged on Friday that should be watched for potential reversals. With $IWM being the only equity not in the top half of the Intermarket list, it adds caution, but doesn’t turn it to an unfavorable stance yet. The weakness in small caps in general puts them at the bottom of the Size & Style list once again which is not favorable for the overall markets. Putting them together, it send us into this week skeptical of any bounces unless small caps can lead.
Sector Relative Strength Rankings
First, I look at the Custom Indexes that I use for all the breadth work to see what they are telling us on a price weighted basis.
Next, I look at a Broad Sector ETF Proxy which I use Vanguard ETFs to make sure things are similar and for some tradeable 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.
Nowhere to run, nowhere to hide. That sums it up for the sector world this week too. The cyclicals we have been favoring got hit hard pushing them down the RS ladder while defensive names moved back up. One thing not to forget is my RS is a 3 month calculation, so it sees more movement than many other RS readings, especially when you have big moves like we saw this week. Consumer Staples and Real Estate went out on the top of the lists on that theme and even Utilities made a big RS move higher. Again here in the sector world, it is very interesting to see so many yield plays moving up right before the FED announcement this week. This week the defensive theme came back in vogue like we saw during the summer months, so we will continue to monitor and see if it was a change in character that can persist this time. It is very hard to find any green on the week which turns us to concentrating on changes in RS readings and where they might be going. There was definitely some jockeying going on during this action, but it is interesting to me how many Technology ETFs are still in the Top 30 list even with it being one of the worst hit sectors this week. Sharp selloffs in leading sectors are not always the start of something bigger, but when the selling is as broad as it was this week, we do need to take more caution and somewhat of a wait and see attitude. There really was no place to hide looking at the sectors and we ended on the lows, so I don’t see any sector jumping out based on this telling us to rush in and buy. Instead, we see if they can get reversals off the breadth extremes this week (will discuss that next) and if there is any strength behind them. It is a combination of the breadth and RS action that I like to use for guidance, but right here my focus leans more to the breadth side for more specific action ideas while monitoring the RS reactions this week.
Broad Market Breadth
Universe of 3,300+ 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.
This is where it is the ugliest in my view. After saying last week things were holding up okay, this week breadth rolled over pretty hard.
- McClellan Oscillator & Breadth Thrust Indicator close the week at extremes.
- Friday registered a 90% down day which usually leads to a bounce in 1-3 days.
- NHNL Differential took a big hit this week with new highs all but disappearing.
- Advance Decline continues to weaken and made minor lower low this week.
- McClellan Summation is rolling over and challenging -500 now which is our line in the sand.
- Moving Average Breadth have all fallen back into the bottom quadrant, but are not deep enough to get excited about them, so still on the concern list for now.
Man, what a difference a week can make. Last week the small cap lag was noted, but not having big effects yet, but this week small caps led a broad decline that hit most everything. The negatives here are growing and worrisome from the longer term perspective, but the short term extremes here in breadth and in other sentiment measures are suggesting a bounce soon, probably this week, but it better come with some serious muscle if it is to improve the intermediate and longer term measures. The progression we saw off the fall lows got clipped this week so we are back to square one. Short term extremes need to play out and build from there to get things back on track.
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.
Clicking on the highlighted links will go to a page with the dashboards for the Subsectors.
As mentioned above, most everything got hit this week and it shows in the sector breakdown. Actually, almost everything. Precious Metals Advance Decline line slightly rose this week even though the subsector was not positive. That really isn’t a lot to hang your hat on. The selling was broad and deep, but started to feel like a bit of panic on Friday as the day progressed.
It looks like Financials actually took the biggest hit from a price and participation standpoint; starting and ending the week with 90% down days which matter in a sector with this many components. Friday was actually a 96% down day. Whoa! The Summation Index is testing the flatline here and only 6.2% of the components are above their 20sma and only 15.88% are above the 50sma to end the week. Another interesting turn of events with Financials being seen as the beneficiary of any rate hike. Nothing this week played along with the rate hike rhetoric, so it will be very interesting to see what Yellen does. On the positive side though, we must mention again the heavy 90% down day along with Breadth Thrust and McClellan Oscillator extremes which have both only seen lower readings once since 2012 which was the August flash crash day. These types of extremes have all been at or near prominent lows. There always can be a divergence or retest, but many I see on my charts going back to 2012 have been more of the V variety with sharp moves starting fairly quickly. This time may be different and it always feels that way in the heat of the selloff, but I think it is worth giving them the room to bounce and prove it one way or the other. If, by chance, Financials do reverse hard from here, it should bode well for broad markets and $IWM especially as it carries a 25.77% weighting in Financials. That is still a big IF at this point, but we should know soon as the extremes here are pretty stark.
The short term extremes are pretty heavy across most sectors. Using the Breadth Thrust Indicator as our measure, we currently see extremes in the Broad Universe as a whole, 9 of 10 sectors (Health Care sits at .4012, being the only one not below the .4 extreme line), and 42 of the 49 subsectors I track. That is not likely to last very long.
Sectors are back to breadth extremes that produce bounces and with all of them there at the same time, it increases the odds of a solid move that can be more than just a bounce. How much thrust we see off these lows whenever they do happen will be the clue to which sectors will carry forward. RS has defensives heading back toward the top right now, but they aren’t likely to stay there long if the reversal takes hold. Watch financials closely as they could be the key to small caps and broader participation across the board.
Don’t forget the Breadth Compilation Charts allow you to view all the relevant breadth indicators on one chart for each sector as well as the entire universe. One thing to look for is when breadth extremes line up in multiple indicators on a chart.
Final Note: This week was very tough and did a good bit of damage. Not insurmountable, but troubling for a month that is usually so strong. In last week’s final note, I suggested if we were soft much longer it could scare people out of good positions and that is exactly what I think happened this week. The question now is how scared? And what fears are taking the helm? The fear of losing and a new bear market or the fear of missing out and underperforming into the end of the year? It has been a tough year for markets with very few broad trends supporting them, but outside of commodities the bears just haven’t had enough strength to persist.
These short term extremes put us back at the starting line of the breadth progression; so we reset and see how it pans out, but we need follow through participation by buyers sooner than later as we might find a trap door if we keep bouncing along the bottom when it comes to participation which would cause more serious problems for equities. Short term players, this is your spot to pay close attention and take advantage of these extremes; but the longer your horizon goes out, the more tepid I would be with making new commitments until we see more proof buyers can take back control. Dipping your toe in the water is fine, but be nimble and commit new funds only as positive evidence mounts. If it does, Santa might still come see us after all.
Have a great week!
G. Thomas Lackey Jr, CMT CFP® CFS
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