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Previous reports can be read here.
Macro Relative Strength
The Santa Rally seems to have different parameters depending on who you talk to and who is backtesting, but suffice to say, various seasonal tendencies line up to favor equities going into the end of the year. At the end of last week, it wasn’t looking so good for those tendencies, but I suggested we not give up yet. Markets were sitting on the edge, but once again were able to stabilize and back away from trouble for now. Major indexes stabilized Monday and climbed most of the week on the low volume trade. This moved most Equity proxies back up the intermarket, however $IWM remained in the bottom half only moving up one spot. The Size & Style this week sits in an unfavorable structure going from large to small. Strong trends often have a small to large and growth to value setup which is almost opposite of what we see here. With Small Cap seasonality the strongest into mid January, I would expect this to be improving, but nothing here yet. Markets bounced back with strong weekly moves, forging Morning Star like patterns, but didn’t really change much in the macro structure which remains mixed. Going into the last week, seasonality stays strong and many big players will not be involved increasing the likelihood for continuation of these reversals which is likely to put most of the markets right back in the middle of the ranges with $QQQ having the best chance to challenge the highs before ringing in the new 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.
Sectors all jumped on board this week’s train and moved higher with the Defensive sectors still at the top of the RS lists, but not atop the performance for the week. It was what many would call a garbage week. Sectors and names that performed poorly this year like Energy (especially Solars & MLPs), Basic Materials and Industrials led the week. All the sector returns were over 1% except Real Estate which took a break this week.
Technology also had a decent week when you strip out the largest players. You can see this by comparing the Sector RS lists above where you can see $VGT has fallen down the cap weighted list to the 4th spot while $RYT holds 2nd on the Equal Weight RS List. $AAPL and some of the FANG stocks that have performed so well this year didn’t really participate much putting a damper on the large cap tech world for the week. The comparisons are good to do once in awhile to see if there are internal sector opportunities to explore. With ETFs like $RYT & $PSCT, you can compare and contrast to $VGT $XLK $IYW; it can help you decide if you want to be favoring large versus small cap names. The best way I know to compare these is with relative comparative (ratio) charts. You can even do this to some extent on the subsector levels with Ishares industry ETFs since most of them are equal weighted. So, for example, using Semiconductors comparing $SMH versus $XSD in a ratio tells us if investors are favoring the entire space or leaning more toward the large names. For many, this is getting too deep into a sector, but the more you concentrate on sectors, knowing these shifts and other industry nuances is worth a little attention.
This week may just turn out to be a holiday trade, but I have found there are some sneaky turns hidden in those low volume drifts. Many of the worst sectors had big weeks, some with catalysts, some just out of selling exhaustion, but whatever reason, they were marked up and in some cases buyers were aggressive. Take the Holidays into account, but trust the action and the charts more as we saw some relentless buying at a few junctures this week. Major Indexes could remain slow if the mega cap players take the rest of the year off, but that doesn’t mean there can’t be good movement in the broader markets and especially specific sectors when they get started moving. If that is the scenario that plays out, this would be where those equal weighted and small cap ETFs come in handy.
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.
We got the price reversals right off the bat that forged the short term divergences all over the charts which played out again. This keeps the major washout theme in play; if correct should see the markets climb out from this low. Let’s see what stands out this week:
- McClellan Oscillator & Breadth Thrust Indicator cleared recent downtrends in the indicator peaks for potential initiation thrust.
- The 80% up day on Wednesday as up-down volume was very strong open to close.
- Moving Average Breadth all readings made new highs with/ahead of price.
- Advance Decline line appears to be leading price on a short term basis out of these lows.
- McClellan Summation Index crossed up below zero for buy signal.
- NHNL Differential is still negative and the biggest longer term warning flag.
- NHNL Differential, Advance Decline Line & %>200sma all still very depressed and weighing on things until they start seeing some improvement.
I am happy I mentioned the potential divergences early as they played out well and set the markets up to continue the progression. This week we moved out of short term extremes to intermediate improvement with the Summation Index signal. Now we need the %>50sma and then the longer term measures to get in the game if we are going to see a sustained move higher from here. One step at a time.
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.
The breadth improvement really started two weeks ago which is what paved the way for the many divergences we saw on the “retests” and survived this week. Looking at many of the sector Advance Decline lines, Breadth Thrust and McClellan Oscillators, you can see the higher lows much more clearly now with some making strong improvements in just two weeks. That said, we are just now seeing most of the McClellan Summation Indexes getting ready to signal and the %>50sma readings are still pretty beat up. Looking through the charts, there are many MAs clustering after all the sideways action we have seen over the last year, so any improvement from here is likely to start showing up big on the readings. You know by now the Summation Index remains one of my favorite intermediate signals, and with all of them lining up to cross together, it provides the potential for a strong and broad move out of this area if they all start signaling.
After a tough start to the month, seasonality (and moving past other catalysts) looks to be creeping in on a broad scale. Breadth is improving across the board out of the recent lows which gives a better chance for continuation higher in the short term which is likely to provide more intermediate term breadth signals if so. So with improving breadth as a backdrop, for the intermediate investors, many sectors are moving above short term consolidations which can give well defined risk for stops and good potential for the move to continue higher; but overhead resistance and timeframe taken into account, just make sure the risk to reward potential is still tilted in your favor.
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: I think this week took us off the ledge and set up for more improvement and even a challenge of the old highs in the coming weeks to months, even in $IWM! This will likely take more than this week, but the price action we saw coming right when it was needed and with broad participation sets us up for the potential at least. The short term divergences played out well and are making some waves up the breadth levels, but need at least some continuation this week to forge the intermediate signals. It seems very possible we could get it this week. I could not get myself to turn bearish last week since we didn’t really confirm below any important levels nor did the breadth show negative expansion. I am happy I didn’t. There are certain times I might be willing to play an anticipation game with short term moves, but for longer term character changes, I find it is best to let them confirm before getting too caught up in the what ifs.
Have a great last week of 2015!
G. Thomas Lackey Jr, CMT CFP® CFS
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