*If you are not on the email list and would like to review the full report each week, please email me at firstname.lastname@example.org and I will add you to the beta list. Please include your Stocktwits or Twitter handle in the email if you have one. You will receive a weekly email with the password to log in to the report and any updates there are during the week. I do not share your email with anyone at any time.*
If you just want the highlights for now, check out the Executive Summary. (Will be posted Sunday AM, have a Charity event tonight)
Macro Relative Strength
Intermarket Relative Strength is not the ideal structure with Equities leading, but Commodities are the next best alternative. Mainly because there are plenty of companies that are in the commodity space to play. That said, $QQQ $IWM in the top half still shows some risk appetite present. Many will call the commodity play and inflation play, especially with $DBA so far out front, and that could be true, but this week it didn’t move the needle on Interest Rates. Money continues to flow to areas that investors think might actually move. Bonds and the Dollar aren’t normally the place to go when you are looking for strong or fast returns (unless something really big is wrong), and that doesn’t look to be changing here. Investors want growth which we will see in the next scan as well. Intermarket structure still supports looking to risk areas for opportunities and right now commodities are leading that charge.
Equity Size & Style Rankings showing nice action even with the Major indexes flat to down in many cases. Why? Mainly because Small Cap led. $IWO was the top performer with $IWM coming in next accompanied by a nice snap back in RS. Now stepping back and looking at the broad view, we see Growth leading with Value lagging. All of the Broad Equity RS Ranking Scans can be seen by clicking this link. Back to Growth leading and Value lagging is how we want it structured and Small Caps leading the week is encouraging.
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 put in another solid week at the office, especially with so many Major indexes flat or down. That is the big problem with cap weighted indexes, they often don’t tell the real story of the markets. The 10sma of the Differential even crossed above the 30sma this week which is another positive. Still fine with how we are progressing off the lows. No warnings here right now, continues to progress well.
The Advance Decline Line even made new highs this week before price. Breadth leading price is ideal on this indicator. We still need a clean break, but participation often can push you over tough hurtles. Made new highs before price showing participation is broad and should pull price with it.
The McClellan Indicators continue to shine as great breadth tells. The Summation Index continued to climb this week and moved back above zero even while the price action was choppy. Notice the Oscillator is getting a little toppy, so a few more days of consolidation or correction wouldn’t surprise me, but the Summation looks determined at the moment and it is most important to the trend. Summation Index is back positive giving the confirmation signal here and should help the battle to get to new highs. Oscillator can diverge or pullback a while causing volatility, but usually not a top until the Summation index says so.
The Moving Average Breadth 20sma & 200sma readings are back in go territory. The only hold up is the 50sma reading, but they are not exactly weak. No real signal here right now, we just want to see them sustain or build on these levels. No current signal, but in a good zone for further progression. Hard rollover from here would be a worry, but until I see it I’m not going to anticipate it.
Breadth Thrust Indicator is starting to diverge after a very strong surge off the lows. This is not usually a worry spot and can diverge for a long time after such a thrust. This goes back in the toolbox for now. The divergences off the strong thrust can last a while and suggest maybe the easy money has been made, but more volatility does not mean we can’t go much higher before a larger top. Waiting for next oversold signal here.
Percent Days (exact same message as last week) 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: The markets are back in gear and on solid footing. The near term challenge is we are sitting at the highs. With the breadth as strong as it is, I would expect digestion or consolidation over a strong pullback here. Anything more than a 50% retracement of the move off the lows would start to worry me, but right now I expect some volatility as they prep to make a strong challenge of the highs. As with any tough obstacle, the broader the participation when trying to conquer it, the better chance you have. If that holds true here, we should go through the highs sooner than later.
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 still hitting on all cylinders helping propel these markets. The move off the lows was stronger and had more participation than many believe which suits me just fine. Even some of the lagging sectors are showing pretty strong participation which suggests all you need to do is look behind those big names that dominate the indexes and you will likely find better performers. Financials are a great example of this. They have been lagging, but look how the Advance Decline Line is getting ready to breakout.
Broad Sector Moving Average Breadth at this point can be used more to monitor the trends and make sure the breadth is keeping up with price movement. Most of the short term readings are pretty high, so moving to the progression of the intermediate can guide you for now. Here we can see how some of the popular sectors like Financials, Industrials and Consumers have been lagging on the way back up. This will either turn into a bigger warning or fuel in the next few weeks.
Broad Sector McClellan Charts is another place we find our differentiation as far as the trend participation in the sectors. Real Estate continues to soar while Technology just fired a Summation buy signal and Utilities are just starting to emerge in this measure as price leaves big consolidation areas. Using these in conjunction with your sector charts can tell you a lot about where you are in the move.
Broad Sector Breadth Thrust in waiting mode for new oversold signals. I am not a big fan of using this at highs.
The New High – New Low Differential is now starting to get some movement helping show us which sectors are experiencing a change in character and making more new highs out of this pullback and which ones sustained more damage internally.
At this point in the rebound, the breadth work turns more to monitoring the trend strength and sustainability. I have heard all week about how this rally may not have sustainability, but when I look at the breadth we have, I am not sure where that comes from. We can still get some complementary signals and use this to find sector dispersion. So far the participation is broad and strong and until that changes (which it will before a major top), stick with the trend and realize short term pullbacks are part of the game. Learn to game them instead of them gaming you.
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.
The sector world was more mixed this week as the broad equities were, but hardly anything that gave a big sell signal. In many we are consolidating just below the recent highs. As always it could turn into more, but with the breadth we see let’s give it a little leeway. Not many big shifts this week, but Health Care continues to be the standout on many measures.
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
Our final sector to cover before starting to pull them in a more random fashion is Industrials. It was a big leader in 2013 and has been lagging a bit to start the year. We will take a look and see if we can identify if it is to remain on the defensive or about ready to get back on offense.
Industrials was one of my favorites for most of 2013, my biggest problem was I trimmed some in the fall instead of letting it run through the year. It was a great performer, but it took a bit of a hit in the pullback. Looking inside at the subsectors shows there are still some very strong areas. It is a big sector with 6 subsectors as shown below:
It is a diverse sector, but the largest subsector being Commercial & Professional Services is somewhat of a catch all so far. It contains as many business to business companies as I could identify spanning almost every sector. Many of these names might be able to be wedged into some subsector within another sector, but don’t really completely fit. This is why you might find some interesting names in that subsector.
The Advance Decline Line has been on a rampage since late 2012 until the big hit to start 2014. Now it is right back challenging the highs while price lags a bit. Looks like there should be some good opportunities underneath. Price plays catch up more often than breadth leads to no avail.
Percent Days showed some notable capitulation near on the way down as sellers unloaded heavy for about a week. I am not one to need big percent up days to be happy, a continued grind higher after that big selling is actually preferable in my book. If the markets do by chance rollover right here though, this one could easily retest those lows. That is not my first scenario, but always a possibility.
The Breadth Thrust Indicator got the thrust off the lows and combined with the other breadth readings it served well, but it didn’t thrust as high as we have seen. This is not a topping indicator for me, so I will just make note for now.
The McClellan Indicators gave solid signals off the lows as well. It doesn’t make sense to give up on the sector when the Summation Index never lost the flatline and is now heading back higher. All this while the Oscillator gave us a nice extreme low on the pullback. So far supports a continued move back to at least challenge the highs, if not more.
The Moving Average Breadth had a great signal off the lows, but now is showing the lag we have seen so far. It is something worth monitoring more closely, but for now it is a slight caution at most. It can just as easily break higher as lower and with the McClellan so well setup, don’t be too hard on lower yet.
The New High – New Low Differential seems to be doing okay right here. Its printing new highs and sustaining its move off the lows with the Differential moving averages firming. A surge higher would certainly help confirm things.
We can see that the early 2014 weakness took a toll on the broad sector, but looking below you can see that was not equally distributed.
Aerospace & Defense continues to be a the leader as it is already in new high territory. The rest seem to be at or very near those highs already even as price lags. That tells me there are some larger names that might be weighing things, but plenty of opportunities for those willing to dig a little…and we are!
I have also added a page with all the Broad Sector Industrials Breadth Charts to view them in the same layout as the subsectors above.
Here are the Industrials RS Rankings:
For those who would rather dig into the individual holdings, below I have the top and bottom 40 RS ranked names in the broad sector.
If you want to dig deeper into the Individual Industrials 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. As we sit now just under the highs many are looking for a rollover which could happen, I feel congestion or consolidation is more likely before we challenge those highs in earnest. 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)
The information set forth herein was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy. Neither the information, nor any opinion expressed, constitutes a solicitation by us of the purchase or sale of any securities or commodities.
There is no guarantee that the views expressed in this communication will become reality.
Investing in the stock or bond markets involves risk and potential loss of principal. Investment strategies should be thoroughly vetted and discussed with a financial advisor prior to implementing.