January 12, 2014 Strength In Numbers
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As we enter week four, I think the report is beginning shape up. Still a lot of data, but that is fine for now, I will segment it later. Thank you all for the feedback. I have already made a few adjustments based on it.
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:
We continue to see Equities dominating the top of the rankings with Dollar and Bonds in the middle and Commodities toward the bottom. The only thing I don’t like here is seeing Oil at the bottom. If it is due to extra supply, that will be fine, but it can be a leading indicator for economic slowdowns as well. For now, I think it is a supply issue, but will keep an eye on it. Overall no big Intermarket headwinds.
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 after feeling a little droopy last week, the New Highs tally moved higher as the week went on even while the equity indexes were basically treading water. As long as all the indicators in the differential box stay positive (or even better, expanding), take advantage of it. This indicator will begin deteriorating before we see a major top, and historically gives a sell signal pretty relatively early in major bear markets.
The Advance Decline Line moved step for step with the custom index this week as it does most of the time. Most know it is when we get divergences that we need to be concerned, and for now we are not seeing any. My universe AD Line is currently lagging the $NYAD which shows interest sensitive components there had a stronger week than equities.
The McClellan Indicators are still painting a strong picture. After not flinching last week, the Summation Index resumed it’s ascent while the Oscillator held the flat-line test so far. The Oscillator has more room to weaken before getting oversold, but persistent moves occur when it clusters above or below zero, so always keep an eye out for that.
The Moving Average Breadth are trying to curl back up here at very high levels showing bulls are not ready to relent. There is just not enough weakness here to suggest a bearish overtone at all. This bodes well for strength in Small Caps we have harped on. The MA Breadth readings are used for entries when they are oversold which we are far from right now, so we are just spectators here for now.
Breadth Thrust Indicator also formed a very high pivot this week adding to the strength of the current trend, but not helping much with entries right now. It is likely to run to another peak soon meaning the markets are going with it. Maybe we get a divergence this time, but remember they can form strings on this indicator before price ever cares.
Percent Days remain very quiet as it seems more have been squaring positions to start the year. Taking some profits and some rebalancing is normal. Since it has been quiet for a while, I do expect we will see some action here in January. Whether or not the action will mean much is the question. Some volatility would actually be nice about now.
Summary: This was the first week back to work, so as Institutional players get settled back in, we should get a better idea of what is next. We have yet to see much of a rally attempt in 2014 and I do expect we will get one before we see a real correction. So far, the breadth data agrees with me. Things are just holding up too well to be overly concerned at this juncture. Corrections happen, get used to it, but breadth will tell us if that correction is morphing into something bigger.
Style & Size Relative Strength Rankings
From a broad perspective, we look at the RS rankings for the largest ETFs in each category.
Small cap growth grabbed the lead this week, but all growth was not far behind. Value was solidly anchoring the list this week. This puts the defensive sector breadth improvements mentioned above into question. It will be interesting to see which one ends up being the tell. Right now, with the strong trend in tact, I would go with growth myself. Remember you can click on the table and go much deeper into each category.
Broad Sector Breadth
This view 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 continued to hold up well as the markets bounced around. At some point during the week, Health Care, Technology and Industrials all printed new highs in the AD Line. Real Estate is testing its larger downtrend on the AD Line right now. Also worth noting the Consumer sectors seem to be taking a rest. Remember if you click on the section title or the Dashboard, it will take you to a page with all the broad sector AD Line charts.
Broad Sector Moving Average Breadth readings continue to look strong overall, but short term are starting to see some separation in the performance. This week seemed to be all Health Care, Real Estate and Utilities. On its own that suggests many are coming into the year taking a little more cautious stance and looking in some defensive areas to place new money. One week does not change everything, but worth seeing if this works itself out this week or persists.
Broad Sector McClellan Charts continue to exude strength in most sectors. The laggards this week were Consumers and Financials. If these continue to rollover, it will be a yellow flag for the major broad markets. The rest seem to be continuing to point higher on the Summation Indexes. The Oscillators are making high pivots, even in the weaker sectors. These high pivots should lead to more upside in the short term. If they don’t, we might see a more abrupt ST pullback.
Broad Sector Breadth Thrust readings saw more high pivots during a market that didn’t really move a whole lot. Money is still moving into these markets on any weakness, it just may not be going into the high flyer big names that led in 2013.
The New High – New Low Differential charts showed expansion this week after wavering a little, but a closer look shows most of the action was in Health Care. Looking back up this section, it seems Health Care made some big moves on all these indicators.
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 trade-able 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. This week I added a way for you to look review the charts on FINVIZ.
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. 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 ETFs for opportunities.
Another good week for our highlighted sector with Real Estate breaking out of its immediate base on Friday after seeing the breadth improve all week. It didn’t hurt that some pressure is starting to come off interest rates as suggested here. There is a lot of pressure built up there since Interest Rates were the main worry most of 2013, therefore I think there is also a good bit to release over the coming months supporting this theme. This week I was going to highlight Financials, but after seeing the action in Health Care, I couldn’t resist. Of course, many will remind me they have been strong for a while now and this week could have been a blow off. I guess I could believe that too if I didn’t have these charts to investigate myself. I will admit anytime you get a week as strong as we just saw, it is usually not the best idea to dive in head first. Health Care could see a sharp correction at any moment. If it did, I would be eagerly looking for a good spot to enter, not for a long term top. You will see why as we move through this analysis.
Here we see the sector breaks down into four subsectors each large enough to give very solid breadth measures. Below you can see how they stack up versus each other in RS.
The surprise for most is to see that Biotechnology is and has not been the RS leader here in a while. Pharmaceuticals have dominated this sector over the last quarter. The Providers continue to lag, but if you dig down, there are still some good performers in there. It seems the Providers are feeling the most weight from the Obamacare roll out.
The Advance Decline Line had a huge surge this week (which we will see elsewhere as well) after back-testing the horizontal line it has been dancing with since last May. Notice now it is at another congestion zone that might slow it for now. However, when you look at the bigger picture here, there is a lot of room to old highs on both the Advance Decline Line and Price. This sector started its downturn well before the Financial Crisis and, almost a decade later, is just now starting to show some real life.
Percent Days in this sector have been non-existent for a while now. This is interesting noting the big moves in other indicators. It suggests to me that while money is moving into the sector, there is no mad rush or extremes outside of individual names that go ballistic.
The Breadth Thrust Indicator has been vertical since making the high pivot on the previous Friday. There was no let up here all week long. It is getting up near highs now, but that doesn’t mean price must be near a top. The indicators can waffle around up here for a while if they want. Clustering is normal in a strong move.
The McClellan Indicators are also in go mode. The Oscillator made a high pivot and is running to recent highs. The more important message, as usual, seems to be in the Summation Index which is running hard right now. Looks vertical, but in reality all we have done is move off the flat-line since early December. And look how long we banged along that flat-line without breaking down. The price trend shows money has been moving in here for a while, but not in any frenzied fashion. It has almost been a reluctant entry.
The Moving Average Breadth readings are rock solid. There is really nothing to argue about on this measure as the trend is not new. If you are in the camp that says we have moved too far to enter right now, then wait until the percent above the 20sma reading comes in some and then dip a toe in.
This is a solid sector trend that is accelerating inside a mature broad market trend, but when we back out and take a longer look, it could just be coming out of a big breadth base. The fact that Health Care is historically a defensive sector might even be helping here. More investments could also start flowing back into the sector as the uncertainty of Obamacare continues to subside. Last week will make many feel like they have missed the move, but if these charts play out as suggested, this trend can continue to evolve for a long time to come. Below I have links to the subsector breadth charts:
Looking into the subsectors just helps solidify my interest in this sector. I posted the following tweet from a discussion on the stream:
This is the basis for my theme in the space which I believe is a driver that can last a lot longer than we might expect and it finally feels like there is some real traction here. There is not a sector I don’t like here long term as they will all benefit from the innovation.
Here are the Health Care ETF RS Rankings:
For those who would rather dig into the individual holdings, below I have the top 30 RS ranked names in the broad sector. I extended it to 30 since we have over 350 securities in the sector.
Here we can see that Biotechnology is dominating at the moment. Many of these names have made huge moves already, but be careful making the “too high” statement. Instead, find opportunities you like in either direction, design your plan and execute it. If you want to dig deeper into the Individual RS Rankings by sectors and subsectors, you can find those here.
That should get you started. This week I have added links to allow easier viewing of the trade-able charts which should help you drill down to individual opportunities even quicker.
Have a great week!
G. Thomas Lackey Jr, CMT CFP®
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(All market data above are derived from Stockcharts.com, Esignal, and Reuters Datalink)
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