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I guess the $QQQ lagging prior week was a sign the leader was tired. This week all the major indexes gave up a good bit of ground. Interestingly, the $DIA & $SPY took the hardest hit. This action raised some caution flags in the Intermarket RS List with equities falling to the middle of the list. But the middle of the list shows either some indecision or transition, but doesn’t provide enough to decisively move to one side or the other. Most of this downside action continued to be lead by Energy names which had an inordinate effect on the $DIA due to some high share priced (or used to be high share priced) Energy components. However, this week it was not limited to just that space, but spread to most of the market. There just wasn’t much green to be found in equity land this week with the exception of Real Estate which we will discuss in a bit. The Equity Size & Style shows the damage was spread out over styles too, but also hints to something that caught our eye in the Equity pieces in the Intermarket List. Growth continued to outperform on a relative strength and absolute basis during this week’s selling. This can change with short notice, but is hinting so far this is a normal pause and not currently suggesting the start of something bigger.
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.
This week ushered in a bit more damage on the breadth picture as we gave more ground. It is once again a very mixed picture, but could get pretty heavy if we don’t shore up soon. Now, as you read above, currently I still see this as a normal pause or retracement to back-test recent breakouts or just plain test the will of investors after such a strong run off the October lows. With the markets looking heavy right now, that is a part we MUST not forget…how strong the move off the lows was in both price and participation. These are not usually ending moves.
That said, as we get into our breadth review and start by looking at the long term measures, they have not improved as much as we would like to see off those recent lows and continue to have the potential to rollover if the weakness persists. This has our eyes wide open if problems arise. The NHNL Differential has flipped back to negative along with the 10sma giving two of the three signals for reducing exposure. This one is a tough read with over 50% of the new lows coming from the Energy sector which is only about 8% of the market weighting. We even saw the new lows diverge this week as the markets continued lower…tough read! The %>200sma is also hanging out near the midline. Broad strength will push this above 70%, and the Advance Decline Line is having trouble with it’s downtrend line forming showing reduced participation on the last two moves higher. All of those are cautionary, but none outright bearish right here.
The Intermediate views are mixed with the %>50sma still holding near 50% which is fine with the weakness the last couple of weeks, but the McClellan Summation is rolling over dampening the Intermediate view unless it can turn back up here near the flatline like we saw in October 2013 as the patterns do look similar. So no clear direction on Intermediate.
Then we move to the short term measures which are nearing extremes, but in most cases are not quite there yet. The thing is, with us seeing deep extremes in October, there is no reason we have to see them here if there is real underlying strength in this move. The McClellan Oscillator and the Breadth Thrust are both heading to their lines now. The %>20sma is also nearing it’s oversold line, but has some room to get there. So none of these are in extremes yet giving any real signals, but then there is the Percent Days measure which gave 2 signals this week. The first was a 90% down day on Wednesday which was followed by an 80% down day on Friday. Usually, these are signs of short term bottoms especially when they come in pairs. The rub here is when they expand from pairs to larger clusters over a couple of weeks, it can usher larger pullbacks like we saw in March/April and again in September/October of this year. Percent Days only really suggest we are nearing a short term low and retracement, but do often show up close to more lasting market lows.
The action this week was definitely different than recent. It put many indicators on notice, but was not enough to change the big picture yet. We are still in an uptrend that has moderate breadth support and when the market gets challenged, the fear shows up pretty quickly in the readings as people are skittish. That is usually a good sign for markets on a more intermediate to long term basis. We will see if that proves true again.
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.
Clicking on this section will go to a page with the dashboards for the broad sectors like above as well as all the Subsectors dashboards.
The sector world took a quick trip down this week as the markets had a pretty tough week. We are seeing some extremes surface already in short term breadth measures. Of course, the commodity spaces are firmly in oversold territory. Energy weakness thrown on top of the $UUP strength has been a big culprit here. I think these sectors are getting close, but not sure how close so I will be looking for some signs of strength. One thing that might help usher in such strength is if the $UUP follows through to the downside next week. Yes, this week was the first time in a while we have had a large black candle on this chart, but as always follow through is key. The rest of the sectors are giving more short term pullback setups with the %>20sma readings getting low while the other Moving average stats hold up pretty well. Both Consumer segments, Health Care and Financials all look to be in this position, then you have Real Estate that was the one green sector this week that continues to show resiliency. Industrials are right on the cusp. If they don’t reverse early week, the breadth picture is likely to get ugly quick. Those are a few things I see, but I am sure there are more ideas in here, so do some comparisons. I would love to hear what you come up with.
Check out the Breadth Compilation Page and let me know what you think.
Sector Relative Strength Rankings
First, I look at the Custom Indexes and 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 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.
I don’t want to read too much into the week. The changes in rankings were incremental in most places if at all with the exception of Technology taking a decent hit in the ETF world, but not much movement in my price weighted index. Oh, and of course, there was Real Estate which continues to shine.
Final Note: This week is a really tough read on many different levels. In reality, I believe we are stuck in the middle right now. The damage is not big enough to get overly worried, but is having enough effect to put us and our breadth measures on our toes. The seasonality still favors higher, but shouldn’t be followed blindly. The broader markets pulled back this week for the first time off the recent lows, so I see this as normal and way too early to be calling a top (which rarely works out anyway, so why keep trying?) Above I laid out what we would need to see to move more bearish, so until we see that, we will prepare for and watch to see if support comes in soon as that is what would go with the current trend.
Have a great week!
G. Thomas Lackey Jr, CMT CFP®
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