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After assessing that last weeks Breadth picture was softening, but not too much technical damage, this week things got a little more exciting. I am happy so far with the message that this report has been giving, but know as a whole it is still too much for most to digest. Even the sectors we have highlighted each week have either been strong performers like Basic Materials, Real Estate, Health Care or good tells like the Financial weakness being a good gauge for the markets. Depending on what type of trader or investor you are can make all the difference in which areas you can glean the most value from. That said, I believe there is information in here that can be plucked to notably improve almost any style. Slow money, fast money and most players in between can profit from knowing when the environment is healthy and when it is not where the extremes really are.
I will continue to work on the message and would like to hear how each of you may be using it. As far as current ideas, I did not get to working on a better gallery system (again), but I will. I wanted to get this weeks out early so everyone can enjoy tomorrow’s Super Bowl. GO Broncos!
If you just want the highlights for now, check out the Executive Summary
Intermarket RS Rankings
To get a quick look at the overall Intermarket structure, we start with relative strength rankings below:
Last week, we were skeptical to change course based on Friday alone, but went into the current week cautious due to the shift in the Intermarket structure we were seeing. That was wise as equities continued to weaken this week sliding down the rankings. Metals still suck more, but what’s new. Only kidding…kind of. The fact that Treasury bonds are leading is what you want to see; now they have been there for 2 weeks. The US Dollar is still in the middle, but had a strong week due to its safety currency status. These are just things we don’t want to persist much longer or could have more lasting effects. We are now in week two of fear which needs to dissipate quickly if it wants to keep event status. The longer it stays, the harder it will be to remove. Continued deterioration here is weighing heavy now.
Universe of 3,070+ stocks from 10 custom broad sectors and 49 subsectors. Universe contains 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 showed more weakness during the week, but so far has not seen but one day of modest expansion before flipping back positive and holding into the close of the week. Being a longer term indicator, without a large expansion of new lows and negative readings here, we should monitor the progress, but focus more on short and intermediate indicators for now. So far this is only giving mild warnings, but not expanding enough to take action on. Continue to monitor to see if the correction could be developing into something larger. At this point, it is not.
The Advance Decline Line came closer to the trend line, but is trying to firm up above it as the markets begin to get some footing. It took a hit, but that hit came in basically two days. After a year long trend, let’s make the bears prove themselves a bit more. No big signs of a mass exodus yet without at least a lower high being put in. Suggests shorter term extreme signals should be honored until this begins to break down more.
The McClellan Indicators goes into next week with the Summation Index sitting right on zero and the Oscillator just made a divergence at extremes. Aggressive players should be finding opportunities now and conservatives should be ready if the Summation curls up even a little bit. This is a classic set up. As with all setups, it can fail, so risk management is always key, but if you are honoring the trend, then you should be looking for a short term oversold place for entries or else wait for a new breakout. If the Summation breaks does not turn, it could get ugly quick. McClellan Oscillator has completed a divergence at an extreme reading. It was very short term so one more shot down is a potential, but would look at that as a gift for short term entries if we get it. If Summation can’t turn up soon, then larger implications could be at hand.
The Moving Average Breadth this week we are sitting on the setup (20sma reading pivot up near or below 20% while the 50sma reading pivots near or higher than 40% and the 200sma reading continues to fly high) with one exception. The 20sma never went below 20% which is not critical if the trend still has legs. This is the time to be looking to add exposure on pullbacks. It would be more evidence of bigger change if those pullback buys started failing quickly. Again, a failed signal always has a message of its own. Some stops were probably taken this week for sure, but longer term players still look okay here and might consider adding with the short term players if this week improves. The percent over the 200sma is holding well and curling up above the line to end the week.
Breadth Thrust Indicator finally hitting an extreme and putting in a very short term divergence which is a buy signal for this indicator. One more shot down could be in the cards, but usually, if that happens, it is very sharp and short lived. Very short term divergence at extreme lows is a buy, may have another divergence to go. I still think this is telling us the worst is over short term.
Percent Days after the 90% down day last week, we have seen a couple of bounce attempts without much luck, but no real follow through by the bear either. That leaves us with a stalemate short term. The question is, is this a short term base or bear flag? No way to tell, but I would give the 90% day a bit longer to see if the reversal takes hold. No real action here since last week, but if the reversal doesn’t take hold pretty soon, we could see more 90% days coming our way, which is usually not good when a lot of them show up together.
Summary: So far we can still call this fear an event, but will move to a temporary mindset soon if it doesn’t dissipate. That would likely accompany any larger correction. Going into next week, the extremes are present for a short term bottom if the bulls want to keep the intermediate trend going. If we can’t move off the short term reversal attempt early in the week, it will help the worry set in, likely cause more selling, and maybe a shift in longer term mindsets. That is not what we want at this juncture, but are prepared to work with whatever we get.
Style & Size Relative Strength Rankings
From a broad perspective, we look at the RS rankings for the largest ETFs in each category.
Not a ton changed. Small Caps and Growth remained at the top of the RS list even with the rough action and Large Value and Mega Blend are sitting on the bottom of the list This is one of the readings that has me doubting the calls for a major down move. It is not often that Growth leads in major bear markets while Value languishes.To see all of the Broad Equity RS Ranking Scans can be seen by clicking the link
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. If you click on each respective title or the Dashboard for that indicator, it will take you to a page specifically for those sector breadth charts.
Broad Sector Advance Decline Line continues to give us more clues about the dispersion of the markets. I said I don’t believe we are at a major top, but I certainly think it is time to be more selective now that FEDDIE is taking a day off from time to time now. Nothing terribly exciting this week, but Real Estate and Utilities seem to like the $TLT rally that is holding interest rates at bay and suggesting that might even last a while. If the last 5 years are any indication, that doesn’t mean equities have to be weak, but it does put wind at the sails of sectors that provide good yield.
Broad Sector Moving Average Breadth this should give you more information than any other chart here. The short term weakness continued to start the week, but began to curl as we went on. With so many near oversold and all curling up, there is a good chance the bounce is here or near. Where it goes, nobody knows.
Broad Sector McClellan Charts are also showing signs the one way market is starting to break down on the sector level now, likely causing some of the volatility, but we are also showing short term extremes here. I will be paying attention to obvious strength here and how aggressively those sectors point down to correct themselves on any bounce. The quicker the Summation index curls up, the stronger the move can be.
Broad Sector Breadth Thrust are diverging at or near extremes for the first time in a while which adds to the evidence a short term bounce is getting closer. They can always get more extreme, but don’t wait too long, it may not come.
The New High – New Low Differential is not showing any real extremes just like the Universe chart. It may prove that on a sector level this gives more confirmation than signals since sectors can be fickle.
There are always opportunities to work with in the markets, but over the last year, it seems everything went together. Now that we are seeing some separation between the sectors, measuring the internals within each one is becoming more valuable to find opportunities. As a whole, I believe many sectors are getting oversold and setting up for a bounce or resumption of the trend. How far that bounce goes will be our guide for the next phase of the markets and sectors alike.
Sector Relative Strength Rankings
First, I look at the Custom Indexes and see what they are telling us on a price weighted basis.
Next, look at a Broad Sector ETF Proxy which I use Vanguard ETFs to make sure things are similar and for some tradeable ideas.
This will differ a little due to the different make up of the Capitalization Weighted ETFs. If you click on the table, it will take you to a page that will go much deeper into the Sector ETF Relative Strength world.
As we continued to pullback, we did see Utilities and Real Estate continue to climb in the rankings. That is showing either investors are getting more worried about the markets or less worried about interest rates or potentially both. The worry is the problem, not the interest rates themselves as the market has proven many times over the last 5 years. However, with the liquidity backdrop changing a bit, it obviously has some spooked. The Consumers also continued to remain an underperformer on the RS, but the custom sector showed more of a flatline suggesting there are likely some good reversal opportunities in that space. All in all, it is cautious, but no panicky action here.
I will continue to include the Subsector RS Rankings that will become part of the Sector Select level of my service in the future. Sector Select will provide access down to the subsector level on both breadth and relative strength for those who trade sectors or just like to fish in the strongest feeding lanes. Speaking of strongest feeding lanes, check out this new subsector view I created this week to show where participation is moving to and from. This is where the most focused ideas will come from.
If you click on the table, it will open a page with more. Take a minute to study how these are moving on a price weighted basis before heading over to review the Sector ETF page or even deeper into individual names for opportunities.
Sector Drill Down
Consumer Discretionary actually was the 4th best sector performer this week, but still riding the bottom when it comes to relative strength. I will be scouring this for reversal candidates and, if that is your thing, I suggest you do the same.
Since even before I highlighted the Real Estate Sector a few weeks back, I tried to make it clear I believe now that the taper uncertainty is over the pressure was likely to come off interest rates. Real Estate was the first and best equity sector to play lower interest rate, but the Utes are a close second. Add that to a ridiculously cold winter and you might just have a trade or two. This week we drill down into the Utilities sector.
Utilities is the lowest number of components of any major sector I follow and is broken into 4 subsectors. The low numbers in each sector makes some of the breadth readings a little less informative at extremes, but overall still gives you a lot to work with.
The Advance Decline Line is actually in a Descending Triangle which can be bearish, but trying to break out of the top rail right here. The first attempt didn’t go, but a shallow pullback suggests this one might. If the Advance Decline Line can break out, it would be very surprising if price was not just behind.
Percent Days are useless on a sector with so few components, but I want to show it anyway so you can see why.
The Breadth Thrust Indicator is no where near extremes while the rest of the market gets slammed down to them. There is definitely flow happening in this stodgy old sector.
The McClellan Indicators have also continued to act strong since the year began. Barely flinched this week.
The Moving Average Breadth reading is all over the place here due to having less names in it. It is, however, distinctly moving higher in recent weeks as the rest of the markets soften. Noted relative strength on the short and intermediate readings. The longer term 200sma still has plenty of room to move, especially if the big triangle gets broken higher.
The New High – New Low DIfferential is also not as productive here, but as you can see, it will let you know if the move is strong in one direction or the other as it did last year.
Utilities have been in a huge Triangle for over 9 months now. Usually, a triangle like this resolves with the previous trend which is up. The charts seem to favor that too. The larger implications here are potentially lower interest rates than expected this year or a stronger economy that causes higher demand on the good side. If it is not one of those reasons, then it suggests the fear is setting in and a larger sideways to down market is in front of us. Below are the Subsector Breadth Charts for your enjoyment:
I have also added a page with all the Broad Sector Utility Breadth Charts to view them in the same layout as the subsectors above
Here are the Utilities ETF RS Rankings:
For those who would rather dig into the individual holdings, below I have the top and bottom 20 RS ranked names in the broad sector.
If you want to dig deeper into the Individual RS Rankings by sectors and subsectors, they are here with FINVIZ links for easy chart review. You may be surprised what you can find.
That should get you started. This week I have added links to allow easier viewing of the tradeable charts which should help you drill down to individual opportunities even quicker.
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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