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Macro Relative Strength
We ended last week with me suggesting the markets were in a tough spot, but I felt buyers were likely to show up soon. If they didn’t, there could be bigger troubles. Of course, we got a little bit of both this week. Early in the week, we got the bounce we were looking for and even sustained it into the face of the FED rate hike (which I was wrong about), but then came Thursday and Friday which took it all back rather swiftly. It was not an impressive week at all, but also not enough to signal the “bigger troubles” scenario yet; especially with it being a very heavy OPEX week, quadruple witching all with enormous Open Interest in the options markets with all the volatility of the last month. This OPEX is usually bullish, but it seems the crosscurrents were too much this year and sellers won out. Put it all together and ended the week on an edge once again.
The action didn’t change the Intermarket RS list a whole lot other than $UUP making a decent jump back up to 2nd spot. All equity proxies are in the top half of the list except $IWM which was actually the best equity performer on the week. It was slight and didn’t even register in the relative strength readings, but it seems smaller names actually saw some relative performance this week. Heck, it is the first week in a long time $QQQ hasn’t been at the top of the Size & Style rankings, and $DIA is not exactly what we would prefer to have leading. With most of the major indexes closing right at or below support levels on Friday, once again the early week action should be watched carefully for further breakdown or recovery in the relative strength readings. The Intermarket RS List is still cautiously favorable to equities with the Size & Style structure deteriorating a little more. Not a great week for this section of the report as the equity markets can’t seem to get traction yet, but I am not ready to throw in the towel here yet going into the last two weeks of the year.
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.
Even though the overall markets had a losing week due to the mid week reversals, there were some sectors that held up well while others were sold harder. Looking at the Subsector list, you had Internet and Semiconductors right near the top representing the Technology space with many of the Real Estate Subsectors not far behind in both returns and relative strength rankings. Subsectors in Consumer Staples and Utilities were also up on the week as a defensive tone prevailed in the end. Not that unusual to happen during weakness, bulls just don’t want it to take root. Commodity based stocks continued to sell off in what is starting to look like potential capitulation, but we won’t know for sure until after the reversal takes place and it is hard to say when that could be or how long the reversal will last as the downtrend is well entrenched and will take a lot to truly change.
If you are watching sectors for market direction, we need some true leadership to show up in more of the heavy weighted sectors. At least one or two more of the larger sectors like Financials, Consumer Discretionary or Industrials need to join Technology and Health Care with positive performance on weeks like these. As long as the half strong, half weak tug-of-war we are seeing between the heavy weights continues, we won’t likely make much progress, but I am not convinced we will see a big sell-off either. Financials were probably the most disappointing with the FED news, but even there I would not write them off yet as they are testing last week’s lows (admittedly they don’t look good here). Once broken and closed under, it will change the read, but most ETFs in the sector are not broken yet. I could see some stabilization or another reversal after this week’s mixed sector results on a red week. I remain cautiously optimistic with us still in the larger ranges, but admit the short term gyrations have been more than frustrating for longer term positions.
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.
It is in the breadth readings that it starts to get more interesting to me this week and is giving me the feeling we may see that reversal into the end of the year and Santa comes after all. Some might call me a hopeless optimist, but I didn’t see the internal selling pressure this week that I expected after we closed on Friday. To me, it felt much worse than it is looking. It wasn’t good and there is always a chance for that trap door from here, but as often as we see divergences pop up in breadth readings (especially the short term ones), I have a feeling that is a good chance there again. With the custom price weighted index closing right at the previous closing lows, you can look up and see most of the indicators are currently showing potential divergences. They don’t become active until we get the reversal, so potential is the only thing there right now, but something about the positioning of it that has my attention peaked.
- NHNL while negative was not expanding as we ended the week on the lows.
- McClellan Oscillator & Breadth Thrust Indicator hit extremes bounce and now in a potential divergence set up that is fairly common.
- The 90% down day did lead to a bounce and then fade, none of which had high percent days in either direction which I consider a positive that we did not see any clustering.
- All of the Moving Average readings are showing divergent action at the edge of the bottom quadrant (signal line per say), so any reversal early week would potentially trigger them all.
- All of the above positives are tentative and could be reversed quickly with an early week fall.
- NHNL Differential is still negative and the biggest longer term warning flag.
- McClellan Summation is falling and didn’t react at all to the early week bounce.
- The price pattern is very sloppy as the larger base or consolidation is playing out.
I try not to make too much of divergences until they actually play out, but felt the need to point out how many are out there this week not only in breadth indicators, but also other technical readings. They are mostly short period ones since they were formed during this one week, but if those fire, it could be early this week and I find they are often pretty strong moves, again if they fire. If they don’t, it could be another tough week leading up to Christmas.
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.
Bumping along the bottom is the best way to describe the sector world this week. There were sectors like Real Estate, Health Care and Utilities which showed some minor improvement, but nothing to write home about. This is what keeps me from really beating the drum for defensive sectors right here. Seeing only slight improvement in these sectors and no improvement in Consumer Staples breadth at all tells me defensives are not seeing the flows I would expect to surface before a major turn. That correlation doesn’t have to hold true again, but has often accompanied or preceded major market tops in the past.
Now that I talked about all the potential negative action from an intermediate and longer term view, I also feel compelled to speak of the many potential divergences on this level as well. They are not fully formed, but at positions that can fire and produce nice gains from a small package (pattern) when they do work. Another angle of analysis seems to have us sitting on the same edge as the broader markets with directional potential either way from here.
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: Now we see if the faded bounces lead to sharp drops or play out as divergences into the last two weeks of the year. I have a hard time ruling that out because of how weak the first half of the month was and also the very strong seasonality from here until the end of the year. According to Ryan Detrick @RyanDetrick), this is the 2nd best 10 day period of the year beginning Friday’s close. Tough to see it here with most closing on the daily and many on the lows for the week, but my thesis since the fall was a major breadth washout in August and September, so a major top in December would not be something we would expect here. I still see the 2011 analog playing through this move which also still fits with excessive negative sentiment we are seeing on so many measures from bulls/bear ratio, put/call ratios and bearish twitter noise. The markets will do what they want, but notable extremes followed by divergences are exactly what most of the breadth segment of my work looks for, so I will give them the opportunity to fill out and fire before I adjust my overall views of how deep this weakness runs. I can be wrong and a Christmas without Santa is enough to alter anyone’s view.
Have a great week and Happy Holidays however you may celebrate them!
G. Thomas Lackey Jr, CMT CFP® CFS
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