February 16, 2015 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
It took a little wrangling, but we finally got a breakout in the equity markets; not every index broke out to new highs, but most broke higher from some type of consolidation. This strong move during the week also propelled the equity indexes in the Intermarket RS List back toward the top spots. $UUP and $TLT are still hanging up there, but lost ground this week and look as if they could have continued mean reversion ahead. Not in a straight line, but these trends were exceptionally strong, so they will like have some battles along the retracement. It is also a great sign that $QQQ and $IWM are leading they way this time instead of $DIA. The Intermarket RS list definitely made a big shift this week. Luckily, we have been looking for this strength for weeks now mainly due to the resilience of growth segments in the Equity Size & Style rankings. This is exactly why we follow both of these lists to gauge equities versus other asset classes, but also internally versus segments to help decipher what the risk appetite really is in real time. If investors had felt the markets (or the economy) were really in trouble, the growth segments would likely have sold off much worse and much of that money would have been flowing to more value based indexes. There were small hints of that over the last month, but never enough to flip even my 3 month RS calculation. There was a lot of noise recently about defensives leading, but it hasn’t ever shown up in the RS rankings above.
Both RS lists above have shaped up well and are pointing to continued strength in Equities. Of course this can change, but the activity over the last couple of weeks has added confidence to this breakout sticking. If this week can extend the gains, we might find ourselves back in the situation where pullbacks are short, sharp and measured in days for a while. Many portfolio managers could be in a tough spot to start the year if they were expecting a breakdown and continued to reduce (not add) to exposure. If that is correct, they will be using any small pullback to re-engage and even try to play some catch up.
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
The slight upside edge we discussed last week in the breadth picture busted out this week and showed the buyers are still there and willing to participate. The broad action we saw this week moved the breadth solidly back into the upswing.
Positives:
1. NHNL had a solid week turning the MAs back up above zero.
2. McClellan Summation continues higher and ended the week above the flatline.
3. McClellan Oscillator & Breadth Thrust Indicator both held and are heading to 2015 highs.
4. MA Breadth Indicators are leaving the 50% levels behind moving higher.
5. Price made a 7 month high breaking the neckline of the Inverse Head and Shoulders.
6. >80% Days are 5:2 positive year to date even with Friday’s breakout.
Concerns:
1. Advance Decline Line is making new highs for 2015, but still lagging price for now (not terribly unusual, but needs to start playing catch up soon)
I am sure many of my readers can give me more negatives (and positives for that matter), but this is what I see right now and it looks like broad participation supporting the market at new highs and hinting there could be more to come.
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
It looks like all of those curling McClellan Summation Indexes last week were a good tell for what to expect. I have seen this a few times over the last couple of years where a large number of sectors lineup for a potential turn. We saw that last week and the outcome this time was pretty solid. Many of these sectors are still set up for moves higher. Choosing a sector and then checking out the Sector ETF Page is a great way to take advantage of those that look best to you. If it looks like the broad sector has already gone, often you can find opportunities in the more specific subsector plays or an equal weight sector fund. These ideas can often show different characteristics than the heavily biased cap weighted funds. However, the two sectors I want to draw attention to this week are the worst performers. Real Estate and Utilities both took it on the chin. Now, Utilities drubbing was much worse than that of Real Estate and that showed up distinctly in the breadth action as well. Based on my breadth work, both are nearing spots where it makes sense to start looking for a bounce, and it is in those bounces we will get to gauge if the runs are really over or just a shakeout. Only time will tell, but looking at each of them right here, I would expect Real Estate has a better chance of being just a shakeout while Utilities damage looks worse. You can see both sectors are flashing extremes in the ST indicators including McClellan Oscillator, Breadth Thrust, and %>20sma, but looking at other indicators like the McClellan Summation, the NHNL Differential and %>200sma showed a decent amount more damage in the Utilities space. This suggests the longer term trend is potentially giving way. As mentioned first, we won’t know until we get a bounce to see, but a message will be there as long as we are open to seeing it.
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.
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
This week’s strong move in the equity markets is starting to paint a more cyclical theme again which is normally good for the markets. With Technology, Consumer Discretionary and Basic Materials leading both the Sector Proxy RS Lists, it adds a little more confidence to the move. All of these little factors are beginning to add up to a pretty solid foundation behind this move. Of course, we still see Energy is lagging in many of the RS categories, but with it being the top performing sector (by far) over the last month, I expect any further progress will change those rankings quickly. We are already starting to see some of the energy names in the Top 30 Sector ETF list. There is plenty of other strength around you can take advantage of. The top and bottom sectors above give a good place to start; and even if you don’t trade ETFs, find one you like and then look up the top holdings on ETF.com. This is just one example of where to find the holdings, but my current favorite.
Final Note: We got the break this week and it was to the upside. It needs to hold a bit longer and or extend to confirm, but the action under the hood is supporting such confirmation currently. The Relative Strength picture has a growth and cyclical bent while the breadth picture is showing broad participation with solid thrusts off the recent lows. My first thought is we get more expansion; however a pause for a few days is fine, but we don’t want to see the universe pullback much below the breakout point for more than a day or so. I am willing to give it a little room, but that type of action would be the first sign we aren’t as ready as the internals look right now.
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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