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If you just want the highlights for now, check out the Executive Summary.
Macro Relative Strength
Intermarket Relative Strength remains a hodge podge right now. $SLV at the top is not what we are used to seeing, but 5 of the top 6 spots is commodities. As stated before, we prefer to see the equity markets in the top ranks, but if we can’t have that, I do prefer commodities next. All in all, equities turned in a solid week, commodities have just done a little better over the last 90 days. As long as bonds and the dollar aren’t leading, I am okay. My main reason for this is there are plenty of sectors and subsectors to take advantage of that are commodity related. This could be signaling inflation ahead, but that is not my concern here. My concern is finding places for us to invest where the wind is at our backs. With commodities and equities both turning in a solid week, there should be good opportunities in the equity markets.
Equity Size & Style Rankings showed Small Caps continue to lag this week even though they turned in solid numbers. This is one of the areas I will be watching more closely. Yes, Small Caps lagging can be an issue, but it is not that unusual for it to lag in the last few legs of a mature move and I think it is safe to say that is what we are in. So, the first thing we look for now is if they play catch up once the other Major Indexes move to new highs. If so, it will be less of a worry. You should start (I stress start) worrying at the point it stops catching up and begins to diverge much more than now, and by that time it is also likely be showing up in the breadth picture below in a much bigger way. All of the Broad Equity RS Ranking Scans can be seen by clicking the link. Large and Mid Caps are leading now with the edge still going to growth. Small Caps lagging is not a big concern yet.
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 expanded throughout the week nicely. The action looks great here since the price chart hasn’t hit new highs yet. As you can see in the past, most of the big numbers come after the custom index reaches a new level. The 10sma of the differential quickly moved back into positive territory and the 30sma is flattening. All of the differential measurements are back positive and 2 of 3 are heading higher. This indicator is strengthening and the signal count starts over. One note, if it starts to roll back over very soon, that would be a warning in itself.
The Advance Decline Line is back near its highs making that trendline break a distant memory for now. The breadth strength off the lows also lessens the worries about Small Caps lagging since they are at least participating. Back on good footing and might even see new highs in the Advance Decline Line before price, which would be pretty bullish.
The McClellan Indicators turned on the gas this week as the Oscillator ran straight to overbought territory with enough gusto to not only turn and cross the Summation index, but also left it within spitting distance of the flatline. A cross above zero would be the last confirmation needed for anyone using this indicator. The oscillator is a bit high, so short term we are likely to see some pullback or consolidation, but I would view them as opportunities unless the Summation Index gets rejected hard at the flatline. Back in bull mode here, with only hurtle left being the Summation Index crossing zero. A little pause before that would be good to cool off the Oscillator a bit.
The Moving Average Breadth continues to act like we just ended a pullback in an uptrend. 20sma reading is running higher while 50sma reading is back above 50% and the 200sma reading is back above the line of demarcation and rising at a good clip. That is what you wanted to see. I also noticed this weekend there were many sectors and subsectors that got much more oversold and not surprisingly many of them are seeing the strongest bounces. You can find one of them below in the sector highlight section, but will have to go to each subsector page to find out which one. The signal here worked again and is still climbing with room until overbought. That should tell you the larger trend is still in tact and you should invest accordingly.
Breadth Thrust Indicator is seeing a very strong surge here off these lows. And that is exactly what you want to see here…hence the name. However, it is getting up there and as a short term indicator we should be looking for more volatility from here; but that surge sent the right message for a more sustainable move. The appetite for stocks off the lows was very strong shown by the thrust here. Now we watch for divergences of the highs, but remember I am not a fan of this indicator being used for tops. It has done its main job for now.
Percent Days looking back, that 90% day worked like a champ, as they often do. They only get worrisome if many come in a string and we see no immediate bounce. Did its job well!
Summary: Please take a minute to put yourself back two weeks and remember how you felt. The markets were getting a bit scary short term and the news was just piling on, but these charts were telling us to look for opportunities while price alone was not. Pullbacks like we just went through are the hardest to buy, especially after a strong run, but hopefully this analysis helped give you the confidence to take some shots and, at those levels if you were wrong, your stops should have been very close by. Now with the markets back in gear, the opportunities in equities are not terribly hard to find, but make sure you have a solid plan and try not to chase too much. There is always another trade!
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 is as close to hitting on all cylinders as you can get, but that does not mean you cannot ferret out Relative Strength from this chart as well (in case you haven’t figured it out, the way I slice and dice breadth, it is just another measure of relative strength and weakness to guide us). You can take you choice of whether you want entry strength or emerging strength, it all depends on your trading style.
Broad Sector Moving Average Breadth gave you plenty of set ups last week to get in on the ground floor of the pullback. It is hard for me to guide where you should be trading in a broad market move like this, but you can certainly look here for clues. Note how much differentiation we are seeing in the 50sma reading right now. This tells me there is a good bit of rotation that transpired in the pullback and new leaders are likely emerging. It is hard not to notice how different Real Estate and Utilities look right here.
Broad Sector McClellan Charts is another good place to find the standouts. Real Estate, Utilities and here Basic Materials look nothing like the others. That said, all the others did turn up this week as well.
Broad Sector Breadth Thrust gave plenty of signals in the last two weeks and has done it’s job for now. Yes, we might be able to spot a short term top with this indicator, but the reliability is spotty at best. We are better using other sources for that.
The New High – New Low Differential has not really been doing much for a few weeks. I was starting to think there was not value in it on the sector level. That said, I found myself looking at it more out of the bottom to get an idea of where we might be seeing strength. So, I guess there is value here as a supporting factor, just not likely to ever have a leading role on this level.
The sector breadth break down has really been shining in the last couple of weeks helping us in our search for relative strength. Certainly, a lot of information can be gleaned from individual price action, but when you put them together and start taking measurements, it is amazing what we can find. So far in this report this year alone, it has pointed us to Real Estate and Utilities emerging strength. Gave some tips on the softness in Financials and helped us catch a nice oversold bottom in Consumer Discretionary. This is how I have used this research to guide me for almost a decade now and the recent market pullback serves as a great example of why. I still believe no matter what your trading style is, having this data in your back pocket will provide more tailwinds than almost any other analysis out there.
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 tradable 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.
Back to all green this week as the markets had a strong and broad run higher. The only notable change in the RS rankings was Basic Materials making a decent jump in the rankings. That makes sense when we think back to the Intermarket RS readings where commodities were leading. The table above just continues to confirm what we are seeing in the breadth readings; the question for you really is, are you a buyer of strength here or would you prefer to get on board something that is more beaten down like Consumer Staples? Both are likely to provide good opportunities depending on your comfort level and trading style.
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
This week we go back to the side of recent weakness and look at Consumer Staples. It is one of the two sectors we haven’t highlighted yet (Industrials being the other which will be next week), but also showed some good movement in its breadth readings this week off the bottom. Enough to get my attention.
Now, I cannot say this is one of my preferred sectors mainly because the perception of it being old and stodgy defensive names, but in reality that is a terrible bias to have. It shouldn’t matter where price action comes from as long as we identify it and take advantage of it when we can. As you can see, this is one of the smaller sectors we work with:
With such small component counts we should expect these measures to reach extremes more often, but that doesn’t mean those extremes are not playable. With only 15 holdings, the Personal Products might be ignored, but do it at your own peril. There are some important names in there as you can see on the RS Ranking page below.
The Advance Decline Line after a strong move higher in 2013, Consumer Staples started the year by sliding through the trend lines on both price and the Advance Decline Line and it looked pretty bleak here in the depth of the correction.
Percent Days did show a notable pick up from the highs into the lows. I have been saying this may not be workable on the sector level, but it looks like there is a message here, just maybe not actual signals.
The Breadth Thrust Indicator hit the most oversold level it has seen since July of 2012 right before the long run kicked it. Will it repeat? I doubt it, but with a reading that oversold and the strong thrust off those lows, it definitely should be on your radar.
The McClellan Indicators also show a solid move off the lows. The Oscillator surge combined with the Summation Index crossing higher and crossing zero deserves attention. Now, looking at the price, we need to realize we are not buying relative strength here, but instead focusing on emerging strength. How far it develops no one can tell you, but the action here suggests it may be a decent time to give it a shot.
The Moving Average Breadth gave an even better signal. Notice you had both the 20sma and 50sma measures cross back up from below their low lines while the 200sma was dancing with the 50% level. The surge that came off the lows is not that unusual when it gets this oversold. The crosses happened this week, so I think it is still early enough to benefit in the move, but of course the ultimate goal would be to catch it on the day of the cross. I am at the early stages of building my alert system for this down to the subsector level.
The New High – New Low DIfferential gave us a big spike in new lows showing a strong flush right at the bottom. It looks like there was definitely some capitulatory action to help fuel things as well.
So, after a run that lasted more than a year, recent weakness had plagued this sector. It started correcting early, saw a big drop in the heat of the correction, and ended with some capitulation. That sounds like a recipe for opportunity to me. Below you can see the Subsector Advance Decline Line Dashboard to see how each has acted lately.
Looking here it tells me Personal Products have taken a good bit of the heat so far while Household products have continued to show strength. That is just the beginning of the story. The links below paint an even deeper picture of where each sector is right now. Dig deep, chose a feeding lane that fits your style and use the RS work to find your specific opportunities. The links below will take you to the breadth charts for each subsector.
I have also added a page with all the Broad Sector Consumer Staples Breadth Charts to view them in the same layout as the subsectors above.
Here are the Consumer Staples 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.
This should give you plenty to work with this week. I think there are plenty of opportunities right now for any trading style. Even with the short term readings getting hot, under the surface I expect there to be a lot of good winners in the coming weeks. I have brought you this far, now it is your job to take the baton and run the final leg to build a plan of execution that fits you.
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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