If you need the password, please email me at email@example.com.
I continue to seek and appreciate all feedback. I have already made a few adjustments based on it. One this week will be to stop wrapping the text and see if it will make the report flow better on all electronic media.
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:
This week we saw a little more of a mixed picture in the Equity markets, but nothing worth being overly concerned about. The Intermarket structure remained aligned well for now. The Dollar and Bonds are starting to move up through the rankings a bit which is something we will watch as we don’t want to see those two take the lead here. Oil is still at the bottom of the list, but turned in the best week of the group. Again this week I hear a lot of noise about a market top, but in my opinion it actually was a very benign week considering it was OPEX week. 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 continued to sport a positive differential this week; even with the rough day Monday. New highs are still coming in at a good clip overall, and the new lows are only up to 14 out of over 3,000 in the universe. That is not usually a sign of a top in my experience. We do see a divergence still brewing here which should tell you the trend is maturing, but you already knew that. This indicator will begin deteriorating before we see a major top, and historically gives a sell signal pretty relatively early in major bear markets. Still in a positive set up with no signs of a major top showing yet.
The Advance Decline Line forged another new high this week as the major indexes bounced around. There is still plenty of participation in this market. Let any divergence form before having concern here, but also realize this indicator is not designed for short term signals.
The McClellan Indicators have begun to show a more mixed picture as well. The Summation Index remains very solid as it bounced off the signal line and resumed it’s ascent, but the Oscillator seems a bit more shaky after this week. That doesn’t mean imminent doom; it does suggest the uncertainty is higher in the short term. Last couple of weeks could have just been a “resting mode” or possibly the first signs of underlying weakness taking hold. With the Oscillator hanging around the flat-line, there is no way to make a solid directional call, but a slight bit more caution is warranted. That said, with the solid longer term market structure, I would be looking for opportunities if we get a pivot low anywhere near extremes.
The Moving Average Breadth readings are supporting what we are seeing elsewhere. The percent above the 20sma readings have been waning recently and are currently banging on the midline. I would see this as more of a concern if the upper two readings were reacting a little more. Right now it looks like some profit taking is definitely going on, but to try and extrapolate it into something more is premature. Remains a buyable structure for longer term investors while short term players watch for a pivot low in the 20sma reading.
Breadth Thrust Indicator formed one of the divergences that stands out this week. It is mainly due to the sharp drop off in momentum between the peaks. In the shortest of terms, it is worth watching how it develops, but remember I don’t like this indicator much for tops. It is better at spotting initiation swings or thrusts (hence the name). Worth noting a slight warning divergence here.
Percent Days have been quiet since early December until this week, and the message was telling. It started Monday when we almost had an 80% down day, but the Down Volume Ratio did not quite make it (thumbs down). The market noise got very loud Monday as everyone trotted out their own reason this was going to be the big one. Then Tuesday came and we did get a bonafide 80% day, but this time it was of the up variety. So, to put it simply, the bears had a chance to make a statement and they just couldn’t get the job done; then Tuesday comes and the bulls decide to show them how its done. That is a very good message in my book. It wasn’t a 90% day, but that is okay; I actually prefer 80% days in uptrends because it shows the increased volatility of one side taking charge for the day, but not so much lopsided action that it is worrisome. It seems to me 90% days, up or down, come more in troubled markets and tend to remain scarce when the trend is strong. This week’s 80% day was a positive message for the trend.
Summary: As the bigger players got settled back in this week, it makes sense we saw more volatility and selectiveness in the markets. Throw OPEX week in the mix and I think we had a relatively calm week considering. Even with the mixed action, the only weakness we saw was in the shortest term indicators which puts us on heightened alert, but just slightly. The longer term indicators are not showing any structural weakness that I see.
Style & Size Relative Strength Rankings
From a broad perspective, we look at the RS rankings for the largest ETFs in each category.
Small Caps and Growth continued to be the performers this week as I suggested last week, and I don’t see any reason for this to change. If the breadth does start waning more, then maybe we move up the growth ladder, but right now that is not happening. Value, on the other hand, continues to anchor the list. This coincides well with the strong breadth we are seeing and investors are putting money to work accordingly.
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 held up for another week. Most of them curled down a bit Friday, but that is fine. The two I don’t like the look of here are the Consumer sectors, so we will be keeping a closer eye here right now. On the other side, Basic Materials and Health Care continues to shine among others.
Broad Sector Moving Average Breadth continue to show less correlation among the sectors as we move through January. This is good to see for stock pickers and sector players, but can cause heartburn for those who broadly diversify.
Broad Sector McClellan Charts are still sporting a positive message overall, but we are seeing more softness here in the Oscillators in some areas. More muddling than weakness at this point. The Summation Indexes are still showing strength in many areas, but the weakness in Consumer and Financials has our attention here.
Broad Sector Breadth Thrust being an indicator that works best at extremes is not our main focus here, but we do pay attention and right now we are seeing a lot of indecision. No discerning pattern apparent here.
The New High – New Low Differential did not get the expansion this week, but still remained mostly positive across the board. A few slight dips into negative are par for where we are, but none of the weakness is enough for a signal in either direction here.
As we review through the Broad Sector Breadth picture, it looks like we are starting to see more dispersion among the sectors. This report is designed to help funnel down opportunities when the markets become less correlated and require a more focused investment strategy. From the Breadth view, we see Health Care, Technology, Basic Materials, Industrials all continuing to work while Consumers and Financials soften. Too early to decipher a meaning, but one plausible thought is the next leg will be led by business instead of the consumer. Many large corporations have a lot of cash and have been nervous about spending it on improving or expanding their businesses. If they do start investing, that is another flow of capital that will help certain sectors while others lag. The one problem with this thesis is whether or not businesses will have the confidence to spend if they feel the consumer is tapped out. Only time will tell if they have the foresight to plan for the economic expansion to continue and maybe even accelerates as we work our way into this relatively new secular bull market.
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 tradeable 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 relative strength structure also continues to be one of an improving environment. For the most part, we are seeing cyclical and growth sectors leading. Health Care is not normally categorized there, but with the game changing transformation in that industry, I believe it is becoming a growth sector. I am looking at it from an innovation standpoint. Ivan takes a different approach in his explanation this week. While I don’t think it is the only reason, Ivan makes a great argument to why the industry is likely to continue to be a growth and momentum play for a while to come.
The one space that I am starting to get more concerned about is the Consumer space. Both the Consumer Staples and Discretionary sectors have gotten very mushy as of late. The one good note is the Discretionary side is still the better performer of the two, but it does begin to call into question the consumers resilience and put investments here on notice. I will note however, we can see weakness in these sectors without seeing overall market weakness. Their combined market weightings are not large enough to pull down the broad markets alone unless they stay weak for a long period. Especially if heavy weights like Technology, Health Care and Financials continue to perform as these three make up the majority of the markets’ capitalization. Those three sectors have been working well recently. This week we will be highlighting Financials in the drill down so we can see how it is holding.
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 Sector ETF page or even deeper into individual names for opportunities.
Sector Drill Down
Health Care continued to shine this week and I think I have made my thesis as clear as possible there. It is finally time we take a look at Financials, and I think it was a gift that we waited the extra week as the picture here might be starting to change.
Here we see the sector breaks down into six subsectors, some of which are at the lower end of our subsector component counts. Two of them I want to add a little color before we begin. Real Estate Services is where I put companies that service Real Estate through management, financing, insurance, etc. In the make-up, you will see a few REITS mainly because their servicing businesses historically outweighs their ownership status, but this is a gray area sector. The second note is on Money Center Banks where I have included the largest international banks, so this subsector has more names from outside the US than in it. Below you can see how they stack up versus each other in RS.
There is no surprise here that Investment Services is in the lead and has been relatively strong for more than a year now. What is a little surprising is how weak the Money Center Banks look here, but the foreign weighting might be giving a bad read. The Big US names like $BAC $C $JPM have been performing well over the last quarter. I continue to concentrate on the top three weightings as I see them with the most opportunity in an expanding economy, but that is not to say the others will perform poorly longer term. If the economy continues to improve, this sector will thrive; but looking at the sector this week, I get a little more somber view of where we are in the short term.
The Advance Decline Line I felt it was necessary to start with the very long term view to show you that the indicator has soared to new highs in recent years while the price weighted index is still less than half way home. This long term backdrop gives a better perspective of where we are coming from and more importantly where we have to go.
However, as we zoom in a bit to look more recently, we see this sector breadth reading has been held in check for a month now even while price was making new highs into the end of 2013. This is not weakness, but we need to watch closely to make sure it doesn’t start showing.
Percent Days are showing up in recent days on both sides. Looking left, they are frequent which is a little surprising with a sector this large. There is a lot of emotion in this sector generally. I left this chart in candle form because I wanted to note the nice flag that is forming here. This could be showing us the slack we have seen is just digestion of the last move.
The Breadth Thrust Indicator is stuck in the middle and forming higher lows and lower highs which is often a sign of digestion in the markets. No extremes to report.
The McClellan Indicators are where I get the most caution. As you can see the Summation Index looks to be rolling over a bit here, albeit still well above zero. Coupling that with the lack of extremes in the Oscillator, this could just be another sign of more digestion or it may be a larger warning sign. If the breadth continues to narrow here, it is likely to have larger implications in the short term to intermediate term.
The Moving Average Breadth are also starting to show some softening in the short and intermediate readings. The long term reading remains very solid reducing the chances of a major top in the works. This set up confirms what we have already discussed above. The short term picture has grown more uncertain over the last week (why I am happy I waited to highlight). Of course, this is a great indicator for pullback buy signals in an uptrend as long as the percent above the 200sma reading remains elevated. Look for oversold pivots from the 20sma reading with the 50sma readings holding near the midline. That has been a solid setup for many sector swing trades in the past.
This sector has been a solid leader in the rally we have been enjoying, but so far this year we have not seen much participation here. Longer term it still looks to have room to move, so the first thing to do would be look for opportunities if we see any extreme measurements during pullbacks; but considering the maturity of the current market move and the concerns about the consumer, we will be paying closer attention to the longer term readings on any such weakness for clues of a larger shift. It is not there yet. I have also posted all the Financial breadth charts on one page so you can review them in the same layout as the subsectors below:
Here are the Financials 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 used 30 since we have over 380 securities in the sector.
If you want to dig deeper into the Individual RS Rankings by sectors and subsectors, you can find those here. 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)
The information set forth herein was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy. Neither the information, nor any opinion expressed, constitutes a solicitation by us of the purchase or sale of any securities or commodities.
There is no guarantee that the views expressed in this communication will become reality.
Investing in the stock or bond markets involves risk and potential loss of principal. Investment strategies should be thoroughly vetted and discussed with a financial advisor prior to implementing.