December 28, 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
Yep, Santa came through with decent gains this week, but more importantly it came with broad small cap performance which not only helped that category stay on top of the RS rankings, it also improved the market breadth a good bit as we will see in a few minutes. Like we discussed last week, Small Caps and Growth segments leading for the most part bodes well for the markets as a whole. Larger companies usually don’t gain as much in stronger markets due to sheer size, but the small and mid cap names with good strong stories can make big moves under this type of setup. Remember, there is a big difference between absolute and relative strength. None of this means large caps won’t do well; but after a long run in the big caps, the setups I see in the smaller categories look more solid at this moment. The markets followed through well in recent weeks finally giving the $IWM a new closing high and, if it can hold up through Wednesday, it will provide a very nice flag breakout on the monthly chart. Looks like it is time to lean toward these setups while the large and mega caps take a relative rest.
Universe Breadth
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
The Advance Decline Line
The McClellan Indicators
The Moving Average Breadth
Breadth Thrust Indicator
Percent Days
We discussed the quick change made last week in the breadth picture after hitting minor extremes, and this week that played out well to the positive. The message was clear and if you didn’t get a change to read it, I would go back and take a look. The Earthquake analogy is an important one to let sink in and remember next time everyone starts screaming on a 4% drop in the markets. This week we added a few improvements across all categories. In the long term, the NHNL 30sma is pointing back up now, the 10sma is solidly above zero and the 30sma. This completely resets the 3 count for a long term sell signal. The Advanced Decline line broke over its trend line and immediate resistance and the %>200sma is at its highest level since the start of September. The Intermediate term McClellan Summation Index turned up from below zero and confirmed by crossing both the signal line and the flatline. Finally, in the short term indicators, the Percent Days worked like a champ providing a strong thrust off the extremes for the McClellan Oscillator and the Breadth Thrust Indicator. All of this at a time when the price chart is testing the neckline of a monster Inverse Head and Shoulders pattern. A lot of things are aligning right here for a powerful move and the confluence setup is for it to be higher, but if it can’t break through in the next week or two, it could turn into a fast move lower back into the middle of the range. Thin holiday trading will likely influence the day to day action which is why I think there is a small chance it could take a couple of weeks to get a decisive move.
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
Broad Sector McClellan Charts
Broad Sector Breadth Thrust
The New High – New Low Differential
We saw nice follow through in the sector world again this week. It is a little interesting to see Utilities leading while cyclical sectors also perform, but these are interesting times. Make it more important that you look to the data and the charts over the normal memes you hear about sector performance. There are too many variables to account for in a quick rule of thumb. An example in this case is cheap debt and cheap energy costs are quickly shoring up the balance sheets at many Utilities. They still may not be the best fundamentals in the markets, but much better than this sector has seen in a long time. Throw in strong dividends against a backdrop of low interest rates and it starts to make a little more sense. Many other sectors are seeing the same type of shift in their background businesses. Now, back to the charts…I do see many strong breadth sectors and believe if you couple them with the charts, there are some great looking areas right now. Technology, Industrials, Financials, Consumer Discretionary on my price weighted charts are all either in the process or about to forge big breakouts after long consolidations in both price and breadth. Check out the Breadth Compilation Page to get a closer look at how some of these sectors are lining up. On the other end of the spectrum, I also want to point out the rather large divergences we currently see in the McClellan Summation Indexes for Energy and Basic Materials. Now, we have discussed before how powerful this indicator can be when it turns up from below zero with minimal failures. However, in the few times they do fail, the best we can ask for is a divergence. This is a very rare pattern with an even better short to intermediate term outlook. These sectors have greatly underperformed and could still be forging a bottom, but these patterns have my interest peaked over the near term.
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
Top 30 Sector ETF RS Rankings on FINVIZ
Bottom 30 Sector ETF RS Rankings
Bottom 30 Sector ETF RS Rankings on FINVIZ
Other than Health Care taking a beating, there was not an active RS list as far as major changes. Now when you dig down into the sectors on the Sector RS Page, the differentiation is showing a bit more just like we are seeing in the subsector breadth measures. Utilities and Real Estate continue to be two of the stronger areas that usually lean defensive, but to me they feel a little extended here to try and enter. As I mentioned above, I am liking how many cyclical sectors are shaping up and will be focusing on those in the coming week.
Final Note: The short holiday week played along the seasonality lines as Santa didn’t disappoint. The final week of the year is likely to be thin and possibly whippy due to continued repositioning for 2015, but there is nothing in the data above that looks terribly scary at the moment and we are not seeing many extremes on either end of the spectrum right now. The breadth improved throughout the week and many charts all the way from the Major indexes down to the individual holdings still look very solid with nice setups scattered across the landscape. As always, enjoy it while it is here and let your risk management plan do its job if things start to change.
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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