February 8, 2014 Strength In Numbers
*This week I am opening the report to public since there was so much action under the hood in recent sessions. If you are not on the email list and would like to review the full report each week, please email me at gtlackey@gmail.com 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.*
As we entered last week, the data showed things were deteriorating quicker than expected, but also that the data suggested a bottom was near. No way to tell if it is a short term bottom or more until we get into it. I tweeted multiple times last week that I believe we find out more about where we really are by monitoring the bounce than we actually do from the initial drop. The reaction is often more important than the action. We talk a lot about this in trading when referring to news, but isn’t a stronger than expected swift drop in the market news too? So we gauge the bounce to see where we go from here. The markets may indeed need another shot down before we reach a more intermediate bottom. If so, that should become evident some time next week. Even if we see such weakness, historically leaders will start moving higher before the markets, so you need to stay vigilant and honor your trading rules.
For more background on this report, the Strength In Numbers ppoint further explains what I am building here. Last week’s report can can be read here.
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:
The fear came to a head about mid week around the FED meeting and from there the markets began to reverse as the breadth work was expecting. Most of the equity markets even ended the week positive with the exception of $IWM and that is a big exception. The late week move was not enough to move the need much for the RS Rankings leaving the structure here less than desirable. That may all change if we can get a strong push higher from here, but no way to know that yet. As we move forward, we will also be watching to see if Small caps can get any momentum going and become a leader again. If they cannot, it will be a signal to take any future tops more seriously. You rarely see a major top with Small Caps out front. $QQQ is trying to pull the rest higher and it can for a while, but not indefinitely. I believe the dangerous potential of a fear mindset has subsided for now and the event may have passed, but the Intermarket structure suggests some caution is still in order. If we get lucky enough for it to change from a fear event to a fear of missing out, then we see new highs quickly.
Universe Breadth
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 continued to waffle this week below zero for most of it. We even got our 2nd trigger on this chart when the 10sma of the NHNL Differential went negative which is not good. It doesn’t look good, but one ray of light here is when the price dove to new lows this week, the 52 week lows actually diverged along with the NHNL Differential. The Differential went on to expand and swing back positive by the close of the week. This week the warnings went up a notch. If things don’t improve quickly and the 30sma moves below zero, it will be an all out sell signal here and greatly increase the chances we are seeing a larger correction or more. If we can build on the current action, it can correct itself within a few session. Once they are all positive again, the count starts over.
The Advance Decline Line finally broke the trend line early week, but regained it by the close of the week. It is like any trendline, we don’t like to see it broken, but if it’s quick, don’t fret it too much. The trend line break and snapback are not a concern as long as we hold above it here. Still no lower low in the Advance Decline Line.
The McClellan Indicators continue to be acting as you might expect. The Oscillator gave an oversold signal last week after toying with it a bit showing that last wave of selling pressure was strong. That strength pushed the Summation Index below the flat line and diving all week. Only Friday did we get a slowing in the descent, but no evidence of a turn yet. The Oscillator gave traders good entries last week, investors should wait for the Summation Index to cross its signal line for better confidence we have turned. We got another shot down in the Oscillator which so far looks like a good entry for short term traders, but we still need the Summation Index to turn and cross for Intermediate confirmation.
The Moving Average Breadth took its shot down this week to get an even better buying alignment. If the larger trend is to remain in tact, a reversal back higher near here is what we need to see. This week was a good start, but not a critical starting point so there is still a little room for prices to bounce around here. Good reversal setup triggered this week for a pullback in an uptrend. What most are asking is, are we still in a primary uptrend? So far, I think we are, therefore these signals remain valid until proven otherwise.
Breadth Thrust Indicator getting a little more oversold this week with another strong reversal. It was not a divergence, but two extreme lows so close together can still be a good combination. The first extreme low was taken out in price and momentum. Happens sometime, but doesn’t happen too many times in a row unless something is really wrong underneath the surface. The second one had more spring suggesting this bounce may have a little more energy to it.
Percent Days chart is still focused on the reaction from the last 90% down day. It was slow, but we finally got a spring off it by the end of the week. Any longer and I would get more worried we would see another one soon, which would not be good. Also, want to make a quick note about 90% up days needed to negate a 90% down day. I believe that is from a Lowry’s study, I just don’t know how old it is. When I look back over my chart for the last decade or so (plenty of data points), there is no evidence that 90% up days have much predictive value at all. Sure they come after 90% down days now and again, but more often they come in the middle of the trend, so I think we should note them but concentrate more on the down versions for signals. Finally seeing the short term pop off the last 90% day. While it is an extreme and does show some capitulation, it doesn’t give much more guidance outside the short term bottom.
Summary: We saw fear subside some near the end of the week after reaching some reasonable extremes. It should mark a tradable bottom and participation in the bounce is where the larger message will come from. The markets are more vulnerable than they have been in a while and have broken some key levels we need to watch as the bounce materializes. We still need more evidence before we can get on board with the bear market ideas that are getting much more airtime in 2014.
Style & Size Relative Strength Rankings
From a broad perspective, we look at the RS rankings for the largest ETFs in each category.
There was a little more rotation in the middle this week as Small Caps lost more ground. As we mentioned in the Intermarket section, this is not a great sign for the longer term trend, but it does have a little time to play catch up before worrying too much. Large Cap Growth continues to lead with Mid Cap Growth making more headway. As long as I see the growth ETFs in the upper half of the rankings, I will remain constructive. 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 is becoming more and more important each week. The separation between sectors is growing as the markets become more selective. This indicator is showing who took the largest hit, but careful of the scaling on the dashboard. Click on it or the headline link to go to a page with each sector chart.
Broad Sector Moving Average Breadth shows how hard each sector was hit in the recent pullback on 3 different time frames. One stands out to me right now and that is Real Estate strength during the current mess, but it also looks like there are a lot of short term oversold sectors to choose from.
Broad Sector McClellan Charts is also showing the selling pressure has been pretty heavy in some popular areas according to the summation index. It is hard for me to say what looks good here because this information can mean so many things to so many trading styles.
Broad Sector Breadth Thrust gave plenty of signals along with the broad universe last week for short term traders to get in.
The New High – New Low Differential continues to hang out in the middle. There are pockets of weakness and not really anything that is standing out due to notable strength, but that is understandable after the last couple of weeks. Actually, I would have expected more new lows than we actually saw. I am not ready to draw many conclusions based on this indicator on the sector level as I am still studying how useful it is down here. On the macro level, its value has been proven time and time again.
The charts above show you exactly why I have always loved sector investing. Even in the worst of times, there is always a ray of sunshine in one of these. Doesn’t mean you go all in there, but it does help when everyone around you can only see negative. It seems to be we have a tradable bottom in the broad universe and some rotation in the sector world we should be paying attention to.
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 market reversal this week left all but one of the Sector Proxy ETFs positive for the week, but it is worth noting that the price weighted broad sectors showed more red. This helps confirm the issues with Small Cap names we mentioned above. Health Care continues to lead and Technology is right on its tail. It is hard for me to get too bearish with that setup. There are many other cyclical sectors near the bottom we must pay close attention to. If they can snap back in this rebound, then all is good. If defensive names like Utilities remain elevated, it would be a concern. It is notable though that Utilities was the worst performing sector on both measures above.
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 I decided to highlight Energy. Not because it is showing runaway strength or noticeable weakness. I am highlighting it because some very smart traders and investors I follow are pointing out more opportunities there recently. While most concentrate on the $XOM $CVX $COP s of the world, there are other spots in the Energy space that are taking a totally different path.
Energy is one of my personal favorite sectors. I have been trading Oil Services funds for more than a decade now and believe their future is very bright now due to the Energy boom here in the US. Below you can see how I break the sector down into subsectors:
One thing you will notice is my Energy sector could just as easily be called an Oil & Gas sector because I do not include mined forms of energy here (Coal, Uranium, etc) nor do I include Solar Energy (Semiconductor names). I know many of you don’t like that, but I have my reasons. To make it more confusing, I do leave those ETFs in the Energy space because that is how they are categorized in the ETF world.
The Advance Decline Line after moving sideways with a slight elevation most of 2013, this pullback tested the upward sloping TL as well as the horizontal support from the last couple of pullbacks. It looks to be at a critical juncture on this chart, and a break here could be trouble for the broad sector in the short term. In the longer term view of the Advance Decline Line for Energy above, you see it has been sideways for over 2 years and is near the top of its range. A break higher out of this range could have huge implications and kick off a new leg.
Percent Days are useless on a sector with so few components, but I want to show it anyway so you can see why. We do see some clustering of percent down days, but not enough to act on.
The Breadth Thrust Indicator just barely touched the first extreme level here showing it is just not reacting to a lot recently…good or bad. However, one thing that drew my attention on this chart and the next few is the divergence between the price and indicator over the last two lows showing participation held up well during that last leg down.
The McClellan Indicators are also showing longer term divergences as the Summation Index waffles around the flat line and the Oscillator can’t seem to find the oversold extreme of the last few pivot lows. This shows intermediate participation also improved on that last pullback.
The Moving Average Breadth gives us another couple of divergences here on this last low. The one concern here would be if the 200sma couldn’t get back above 50% quickly. It will though if we see any more rebound in this space. This is one case the lack of extremes on the recent pullback is a plus mainly because it was already pulling back well before the recent weakness. The fact that we get the divergences while so many other sectors moved to extremes is a clue.
The New High – New Low DIfferential did show an expansion of new lows recently, but never got above 15. The differential though is at lows not seen on this chart, so this is definitely not an all clear sector.
The Energy custom index came out of a multi-year Triangle in 2013 and ran higher into the fall. It has a 3 wave correction and is attempting to turn last week’s break of short term support into a false breakdown. It is not there yet, but the breadth Divergences suggest it might be worth our while to dig a little deeper. Below is the Subsector Advance Decline Line Dashboard for Energy to see where the participation is going.
A quick glance here tells me Pipelines are leading with Independent Oil & Gas close behind. All of them have been muddling for a while now, so digging into the Relative Strength below might add some clarity. The links below will take you to the breadth charts for each subsector.
Oil & Gas Equipment & Services
Oil & Gas Exploration & Production
Oil & Gas Integrated, Refining & Marketing
I have also added a page with all the Broad Sector Energy Breadth Charts to view them in the same layout as the subsectors above
Here are the Energy ETF RS Rankings
For those who would rather dig into the individual holdings, below I have the top and bottom 30 RS ranked names in the broad sector.
Energy Top 30 Ranked RS
Energy Bottom 30 Ranked RS
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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