February 21, 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
Equity saw nice follow through this week across the board moving them back to the top of the Intermarket RS list. It wasn’t a runaway week by any means in terms of performance, but this structure is exactly what we want to see including the action being led by $QQQ and $IWM. Looking at the Size & Style ranks, we have an optimal alignment as well with all Growth in general on top led by Small and Mid Caps; and Value on the bottom. The current relative strength structure in both lists is about as good as we can expect. Markets can and will ebb and flow. We could even see a breakout retest anytime, but the current overall here is one of strength. I do expect pullbacks on this extension to be short and sharp until proven otherwise.
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 breadth universe continues to expand nice and steadily. Nothing too sharp and no new Percent Days, but across the board, it is continuing to broaden as we climb. The positives continue to mount and aren’t changing a ton, just progressing.
1. NHNL testing the highs we saw most of last year.
2. McClellan Summation continues higher and is strengthening.
3. MA Breadth Indicators continue to climb back to positions of strength.
4. >80% Days are 5:2 positive year to date even with Friday’s breakout.
1. Advance Decline Line is trying to play a little catch up, but still lagging price for now.
2. McClellan Oscillator & Breadth Thrust Indicator are waffling around.
The Advance Decline Line may be the only one that can be concerning if it doesn’t continue to catch up, but as I eluded to last week, lagging at a breakout is not that unusual, but this leg higher needs to accelerate it or would suggest some holes in the internals we need to identify below in the sector breadth.
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
The New High – New Low Differential
There is a good bit of broad strength and participation in the sector world this week, even with the meager bounce attempts from Real Estate and Utilities (still expect a more gaugeable retrace in these spaces sometime soon) coupled with the once again struggling commodity space. On the strength side recently, much of the absolute, relative and breadth (participation) performance came from Technology, Health Care, Consumer Discretionary and Financials. This is important to know because these 4 sectors currently make up 60.35% of the $SPY, and if you throw in Industrials, you are up to 73.38%. So, if these 4 or 5 sectors are performing well, it really doesn’t matter nearly as much what the others are doing (unless they are outright crashing…. eh hum… Energy let’s not have a repeat thank you). Knowing the makeup of the indexes coupled with the report helps me determine not only specific opportunities in sector based allocations, but can add or subtract confidence in broad market based allocations for clients invested in things like retirement plans, deferred comp plans, charitable trusts and other investment strategies that might not offer sector level participation. With good mechanics and process, there is always a way to improve your investment opportunities.
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 on FINVIZ
Bottom 30 Sector ETF RS Rankings
Bottom 30 Sector ETF RS Rankings on FINVIZ
Things continue to build and rotate to a more confident (but not ridiculous, so don’t go there yet) and growth oriented sector alignment as well. The strong sectors we mentioned above in the breadth section are all in or moving to leadership roles from a relative strength view as well. The one I did not mention above was materials because the raw breadth is not as stellar as the other sectors due to metals, both precious and industrial, but that might be changing. With Industrial Metals going into a seasonally strong time and Chemicals also playing a big role in the strength, all it would take is a continuation there and some renewed participation by Precious Metals to shoot this sector on up in the ranks. The ETFs in this space are weighted all over the place, so if you go that route, make sure you check that so you know exactly what you are getting.
Final Note: I didn’t have as much to say this week because we got our follow through and things are working the way we might expect during a leg higher. In the past, I would do my best to figure out some point to make about a data point that could change and take us down just to make myself comfortable, but today I see no reason for that. We expect some ebb and flow, and if it starts effecting things we see, then we react and let you know, but for now our job is to capture as much of the strength as possible with a risk management plan that fits the trading style just in case those changes to start to surface.
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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