December 21, 2014 Strength In Numbers
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For more background on this report, the Strength In Numbers powerpoint further explains what I am building here. Previous reports can be read here.
Macro Relative Strength
Didn’t we learn anything as kids? Santa never comes while you are peering out the window looking for him. That seems to be what we have seen over the last couple of weeks. Everyone got geared up for The Santa Rally and were glued to their windows (screens). As the days passed, the disappointment grew and the rumors about Santa not being real started swirling. And, as usual, just when the majority have given up hope, they look back out the window and see a Red streak zooming off in the distance, then they run downstairs and see all the gifts under the big GREEN tree and the smiles return. That is about how this week felt to me. So many had thrown in the towel after some slight weakness; you could just sense a surprise coming of some type. Yes, it could have been a surprise to the downside, but it wasn’t. This week’s action not only moved the Equities back up the Intermarket RS ladder, it also shot Small Caps back to the top of the Equity Size & Style list. Growth remains toward the top. It would still be nice to see $TLT and $UUP out of the top spots, but that won’t take long if we get continuation which looks likely at this point. As you will see below, the move this week was broad and strong bringing back the momentum we needed for the potential to finish the year off strong.
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
That’s the markets for you, one week they look precarious and the next they look strong as an ox. But then again, it is often when they look the weakest (and the bearish chatter is the loudest) that we can a powerful bottom. That is one of the reasons the breadth work is so important in my practice. It allows me to better see where we really are. While we are on the subject, I also want to suggest you be careful with your expectations when we do hit breadth extremes in indicators like the McClellan Oscillator, %>SMA readings or the such. Many I hear on the stream are always looking for extremes like the ones we saw in 2009, 2011 or this October, but in reality extremes that deep only come a few times a decade. This week I explained it using an earthquake analogy. Often bottoms are formed with very very extreme readings which I liken to the earthquake and then the subsequent pullbacks (tremors or aftershocks) form shallower extremes and higher lows along the way, but still scare everyone because they are still recovering from the big one. To look for massive extremes on every pullback is misguided and doesn’t work out very well. To keep this in perspective is the reason I use multiple breadth indicators over various time frames to form my outlook.
After leaving mixed messages last week, the message turned decidedly positive this week. Here are some of the positives I see in the charts above:
1. NHNL Differential turned back positive, curled up the 10sma and the 30sma saving the latter from giving the final sell signal.
2. Moving Average Breadth readings all moved back over 50% after the %<20sma touched extremes.
3. McClellan Summation turned up from below zero. Still a little early here, but green arrows have been solid during this move higher. Needs to clear the flatline for confirm, but a great start.
4. McClellan Oscillator and Breadth Thrust Indicators both hit extremes and quickly rocketed higher.
5. After seeing 90% & 80% down days last week, this week answered with 90% & 80% upside days which are normally not that important unless they come quickly after selling extremes…which these did!
6. Price chart has almost completed the right shoulder of a large Inverse Head and Shoulders pattern. A break of the neckline would target a 10%+ move after a 10 month consolidation.
7. Volume was as strong or stronger on the move off the lows as it was on the way down.
That is a lot for one week, but it looks like now we need to see if that neckline can break before getting too excited. Markets can change on a dime and we must change with them, putting too much effort in anticipating that is not how I want to spend my holidays. The one area I would like to see some catch up in (which is normal) is the Advance Decline line which is still lagging a bit. That said, the weight of the evidence from the charts above is a continuation higher once we can get through the immediate resistance above.
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.
Broad Sector Advance Decline Line
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.
Broad Sector Moving Average Breadth
The New High – New Low Differential
The sector world perked up this week. I am a little short on time, so I will let the above charts speak for themselves (which some of you probably wish I would do every week). If you are willing to do the homework, there are solid opportunities in pretty much every sector right now with the right strategy and trade plan. But I guess in reality, it is that way more often than many believe.
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.
Top 30 Sector ETF RS Rankings on FINVIZ
Bottom 30 Sector ETF RS Rankings
Bottom 30 Sector ETF RS Rankings on FINVIZ
This week the only big RS moves seemed to be in the Sector Proxy universe with big jumps by Real Estate and Utilities, but all in all this push off the bottom has been across the board. Sure, the sectors that were down the most have bounced the hardest, but that is one of the reasons we watch the RS to see when it shows up here. For me, that is a sign of confirmation of change in character and since my RS is a 3 month weighted calculation, it is designed to pick up those potential changes fairly early in the process.
Final Note: The markets saw a strong turnaround in price and breadth this week at some pretty key points along many different ways I measure. I love confluence and we got it this week in breadth, price levels, momentum indicators, and capitulatory volume patterns in the worst sectors. Be sure not to ignore such a list and give it its due which would suggest more strength for now, but also realize the next couple of weeks will have lower volumes which can increase volatility, so keep your guard up and have your trade plans ready to execute.
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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