January 11, 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
Another down week for the major indexes, but they maintained their relative strength rankings with $IWM even grabbing the top spot on the Intermarket list. It is hard to be too negative with small caps on top. In absolute terms, equities were laggards, so it looks like both sides, bulls and bears, are still trying to find their footing to start the year. Whichever wins will decide the next leg. From this angle of analysis, the bias is still higher due to the Equities being in the top half of the Intermarket RS list and the Size & Style RS List has small and mid cap names leading with a growth bias. Of course, the main exception or caution might be the lagging large cap growth proxy $QQQ. Week one of 2015 is now behind us and we enter week two with a mixed but still constructive view on equities. Small caps and growth names are performing well while large show some relative weakness.
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
It was another sideways week for the breadth world. The markets mid week reversal showed solid moves in price and breadth. Friday saw some giveback, but I still like the thrusting action we are getting out of these lows. Yes, follow through is as much or more important, but we have to give the markets a little wiggle room, even in the Vs we have been experiencing. There is less to report this week, but am going to stick with the below format to highlight what I am seeing better.
1. NHNL differential went negative shortly this year, but quickly popped back on the reversal showing underlying resilience. Both moving averages remain positive as well not showing much change.
2. Moving Average made a quick pivot, but need to push further than midline for comfort.
3. The Advance Decline Line is still waffling around that familiar spot after a higher low.
4. 80% Down day to start the week reversed within two days and followed by an 80% up day showing buyers still willing to push back.
5. McClellan Summation remains above zero and flattening quickly after 2 day reversal.
1. McClellan Oscillator and Breadth Thrust Indicator again saw strong thrusts off the low, but are seeing a quick pivot near their respective midlines. This could lead to another test of the lows if breadth doesn’t expand here quickly.
2. Moving Average Breadth readings don’t need to stall here or we can see more pressure. I am watching the %>50sma the closest here for a sustained move over 50%.
3. Price chart needs to hold above the right shoulder of the Inverse Head and Shoulders to keep it valid. So far, it is okay, but on watch as a very important level for the universe.
I know, it is interesting that indicators can be on both the positives and concerns lists, but currently that is how it is. We need to stick with the current strength and trend as this rally’s resolve has been proven to us many times over the recent years, but at the same time, we need to have spots where we reassess. So far, 2015 hasn’t given too many major clues to its direction, but as the month goes on, I expect we will get a more discernible picture.
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
Sectors felt this week’s reversal as well. Most sectors found a floor mid week, but they started and ended in many different ways. Real Estate and Health Care showed almost no reaction to the market weakness, while Utilities took a sharp hit, but are holding the break out backtest for now. Many are still stuck in the middle like Technology and Industrials; and then you have the Commodities including Energy and Basic Materials which remain the outcast of the sector world. These sectors are likely getting close, but still having a hard time finding traction for now. If you want a quicker move, I would look more at strength in sectors I listed first; whether it is buying breakouts or pullbacks to support in stronger trends. However, some longer term dollars might start sniffing out the commodity extremes. You might even start looking at strength within the Subsectors like recent action in Precious Metals. These charts are starting to shape up and more names are hitting some of the other relative strength scans I do. They still have a ways to go to be considered leaders, but they are showing more positive price action than we have seen in a while.
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
REITS, Retail, Builders and Biotechs are the leaders to speak of. Interesting bedfellows to be sure. The markets had a negative week in the broader markets, but separation between the strong and weak sectors in both percentage gain and relative strength measures is vast. This shows there are almost always pockets of strength in the difficult markets. The hard part is ferreting that out before hand. Relative strength and breadth are two ways I try to do it here. Consumer Discretionary is one of the newer performers on the block, but they have been strong since the October lows. REITS and Health Care are still showing signs of strength on most all measures, so fading them at this point doesn’t make much sense to me unless for the shortest of timeframes…like intraday!
Final Note: We got the first full week behind us and both the bulls and the bears got a few punches in, but it didn’t clear up the directional question much. Sometimes it happens that way, so we move into next week looking for more evidence that one side or the other is going to take the reigns. Overall, the picture still favors the bulls if they should want it. It might just be they decided to take a few extra days off to let the party die down before they come back and pick up where they left off before Christmas. In reality, anything can happen from here, so stay alert and react as the message becomes clearer.
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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