January 17, 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
It was another tough week for equities as they pushed straight back down to support. Last week, I said it was hard to be too negative with $IWM in the top rankings, and that didn’t last long as it is slipping back to the middle of the Intermarket RS list with the rest of the equity indexes. $TLT and $UUP both in the top 3 is also a caution flag. The new player is $SLV, but this has been building for a few weeks. On the Size & Style list, surprisingly smaller and more growth leaning names are still performing the best. The bears definitely have shown up in 2015 so far, but one thing I usually look for at the beginning of each year is at least one push of moneys going into the markets; new assets, if you will. Let’s see if we get any of that this year. It would be particularly telling to me if we lost support right here before seeing that push. If last week’s two day reversal was it, then we might be looking at a rough near term. So far, bears have been in somewhat control, but feels more like abstinence from the bulls than pure strength from the bears. If we lose support just below this week’s lows, it will be a bigger problem.
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
After moving more sideways the last couple of weeks, the breadth world moved to a more negative leaning this week, but just doesn’t seem to want to let go yet. The negatives for the week certainly outweigh the positives, but are still only having minor affects on the long term readings while the intermediate and short term indicators are getting pretty low. Friday we ended the week with an 80% up day, which I don’t put nearly as much weight in as I do the down kind, but it was still interesting to show up right at support. So let’s go through the lists.
1. NHNL ended the week with all 3 pieces positive, but we did see negative readings most of this week.
2. Advance Decline Line made a higher low.
3. McClellan Oscillator & Breadth Thrust both made a pivot at extremes diverging with price.
4. Price has not violated the right shoulder of the Inverse Head and Shoulders pattern.
1. New Lows expanded most of the week pulling the NHNL negative until Friday while drawing the moving averages close.
2. Moving Average Breadth readings are falling lower than normal pullbacks in an uptrend which increases chance of failure.
3. McClellan Summation Index is still headed straight down and now below zero. A turn this week would be necessary to see this drop as a brief excursion.
The markets don’t look pretty, but they did end the week with some potential positives. We move into a short week and see if buyers decide to join in this year or continue to wait.
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
After looking like we saw a short term floor last week, we have many sectors that were driven down into short term extreme territory this week. Understandably, it is a hard choice to follow the signals, but the short term extremes in an uptrend suggest we should be trying to find entry points here soon and use tight stops just below the immediate support in case we are wrong. Still not a comfortable trade to say the least. You may have decided we are not in an uptrend any more so this is not even on your radar, but I don’t see that evidence yet.
Don’t forget the Breadth Compilation Charts allow you to view all the relevant breadth indicators on one 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 on FINVIZ
Bottom 30 Sector ETF RS Rankings
Bottom 30 Sector ETF RS Rankings on FINVIZ
We are still seeing some decent separation between sectors in both the breadth, relative and absolute action. There were a chunk of sectors positive on the week. Health Care and Biotech still ended with gains even after mid week drubbing. One thing that is hard not to notice is the sectors that are leading are solidly defensive (of course, you know my feeling is Health Care is now more of a growth play). Real Estate continues to run hard and Utilities plus other higher dividend plays remain in high demand as interest rates drop ever lower. The question is, are the defensives leading telling us we are about to hit rough times or is it more attributed to other variables like yield chasing and changes in business dynamics in these industries? I can think of some big structural changes in Health Care, Utilities, and even Real Estate to some extent. However, the why is not as important as what is happening now, so this is what is leading. Let’s see where it leads us this time.
Final Note: The markets slipped more this week down to test more important support areas. It is at support areas like these the decisions can be the most difficult. We are still in an uptrend and seeing short term extremes which are tentative buy signals. If they fail, we need to be ready to shift gears very quickly. I will say, it felt like buyers were just not there and sellers would push anytime they saw a chance. Bears have pushed the markets down the majority of days this year, but I don’t think we have seen anyone take the other side yet with any conviction. In my experience, there is usually one good push by the bulls before folding and I don’t think we have seen that yet. If we can get a few days up, I will start gauging how much energy the buyers really have. On the other side, if we do lose support and close under, it would increase my caution and defensiveness quickly.
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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