February 8, 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
And, just like that, we are back at the top of the range. The support levels worked and markets ran hard in to Friday where they couldn’t quite muster up the strength to solidly break out. We have been here before a few times in the last month. The funny part is the chatter about breaking out is not nearly as loud as the breakdown noise has been for over a month now, but that is par for the course. That is part of the reason why I wanted to remind you last week that buying when support holds can be such a good choice. Sure, it can break down, but if or until it does break, the set up usually gives some of the best risk reward skews you can find. It is not easy, but with good risk management, it should at least be considered when in a longer term uptrend like we find ourselves. If Friday’s indecision does turn us back down, it will just put us back on watch for the support break. Sooner than later though, I expect one side to give way. I continue to favor the upside break since we are in an uptrend, but am ready for either. The RS Rankings didn’t give many clues this week except that Small and Mid Caps are performing the best and growth remains an edge. I believe this also supports the upside theme as long as it persists and the market participation continues to broaden out.
The only real drag we still see is the Equity Indices are still in the middle of the Intermarket list. They do need to start moving back up and overtaking $TLT $UUP $GLD which I consider more fear based trades. Seeing a shift like that over the near term coupled with a price breakout would set us back solid footing for the next leg higher. If we can’t break through, then the waiting game continues as we search for clues along the way.
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
After breadth refused to turn markedly negative last week, things sprung back to the upside well this week. This is what you want to see during volatility like this. Of course, in any sideways move, breadth will be waffling, but slowly the internals will start to favor one side or the other. The last couple of gyrations have started to show a slight edge to the upside breadth action.
Positives:
1. NHNL quickly snapped back to positive territory and New Lows all but disappeared.
2. McClellan Summation crossed up and is running toward zero.
3. McClellan Oscillator & Breadth Thrust Indicator both saw nice thrusts higher this week.
4. MA Breadth Indicators are moving to the upside away from the midlines.
5. Price has not violated the right shoulder of the Inverse Head and Shoulders pattern.
6. >80% Days are 4:2 positive year to date even with the difficult environment.
Concerns:
1. Advance Decline Line is making new highs for 2015, but still lagging price for now.
2. %>20sma needs to run back near 80% to avoid creating a divergence.
The positives came way out ahead this week. Not extraordinary strength, but considering price action over the last two months, it is setting up well. Even the two negatives posted are just lagging at the moment, neither is showing absolute weakness.
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
The action this week was broad and shored up many sectors that stalled last week. Energy breadth continued to improve. The Summation is still climbing and this week the Advance Decline Line broke its long downtrend. The broad gains in the market were confirmed by sector strength and participation. However, there was a pretty big shake up in some leaders that are interest rate sensitive like Utilities and Real Estate. The tough week did usher in some breadth weakness in these areas which has us paying attention; but with these being more defensive sectors, it doesn’t have to be a bad signs for the markets as a whole. There are many McClellan Summation Indicators that are curling and crossing from below zero right now. These strengthening sectors in my opinion can more than offset the defensive leaders turning tail, if they actually do follow through to the downside.
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
The message I get from the sector RS and the sector breadth are similar. There still doesn’t seem to be a consistent theme, but we are seeing areas like Consumer Discretionary and Basic Materials move their way to the top which are more cyclical. That said, I would like to see Technology and Financials up there with them to solidify things, but not yet. The price action in those two sectors is improving, but not there yet. If I had to pick one for now, I believe Consumer Discretionary is showing the most promise as we speak.
Final Note: We didn’t break support and are now challenging resistance with breadth solidifying for a breakout attempt. I am not sure there is really much more to say. I am looking for a battle and continue to favor the upside for now, but am open to whichever side it may be, and think the winner will emerge soon to give us our next set of adjustments. A few days sideways before attacking the resistance again would be best case, but be ready at any moment as we are knocking on the door 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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