Reviewing over the first few weeks of the report, so far it has guided us well, but it is over the next few weeks that we might be able to get a better idea of the real value. The markets got their first real shake in a while on Friday. Technical damage is strewn all across the surface, but how much damage did this week really do to the Macro picture?
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:
Coming off OPEX, the markets went straight into a 4 day holiday week. Historically, this week did not show much promise from a seasonality standpoint, but the indexes looked set up to challenge the highs. The overall Intermarket structure was set up well coming into the week, but by the close of the week, the shifts were sending up warnings flags. Not really something to react to after one day which is why it is warning, but it puts any bounce this week on notice. $TLT and $UUP are not exactly what you want to see soaring to the top of the rankings if you are an equity investor. They can hang around the middle, but when they go to the top, it shows fear. Fear is often an event, so these spikes may only last a few days which is why we don’t overreact on day one. If it persists through the end of the coming week, the chance of a longer and possibly deeper correction increases substantially. Big shift in Structure this week puts Equities on high alert, but not down for the count. Fear can be a short term event. It is when it lingers it is more important to react.
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 started holding up well as did most of the markets, but faded as the week went on and ended with the first negative reading of 2014. This is the first of 3 signals we get on this chart and sends up a yellow flag here as well. As you can see by the previous dips below zero in the chart, recently the bears have not been able to make any headway once cracking the surface, and when they lose their grip, we have seen sharp rallies over the coming weeks. That said, this indicator is not designed for short term reads. We have much better indicators if you are looking to play any such bounce. First of 3 sell signals fires with the NHNL Differential turning negative on Friday. If the trend is still intact, we are near a bottom and should not see more than a few moderate negative readings. If this is something different, the negative readings will expand this week. Next signals to be watching for the moving averages to go negative. If that happens, the flags turn red and Equity exposure should be reassessed and parameters tightened on an Intermediate time frame.
The Advance Decline Line made new highs again this week before taking a quick dive the latter part of the week. Two days does not turn a longer term picture like this. So far we still have a solid structure here with Higher Highs and Higher Lows. Maybe a lower low if you use last week’s dip, but come on, really? End of the week took its toll, but this line still shows participation remains reasonably strong. No longer term damage showing here yet.
The McClellan Indicators gave us the best information this week from the Oscillator. Last week, the weakness was noted as a reason for short term caution, but the Summation was still growing, so look for opportunities if we get a low pivot. Friday looks to have started that process with the Oscillator heading towards the oversold extreme. As you can see when that has happened in the past, we were near a Short term pivot and within one more leg of an intermediate term bottom (usually accompanied by a formed divergence). The only rub is the Summation Index crossing down Friday as well. That is an intermediate warning if it can’t be negated this week. The Oscillator is the next signal to watch for and it has worked fine on this chart, but do note that if we are making a major shift in the markets, oversold readings will not continue to work the way they have. McClellan Oscillator nearing an extreme oversold pivot which can be bought by nimble players, but more caution than normal if Summation Index doesn’t turn back up quickly.
The Moving Average Breadth saw similar deterioration as other readings, but this one provides us a nice view of 3 time frames. Simply, Short term is getting near oversold, Intermediate term has sold down to the middle, and Longer term continues to hold right near the 70% range. This setup to me is more for buying than selling until we see that longer term reading start diving a little harder. At this point we are looking for the 20sma reading pivot up near or below 20% while the 50sma reading pivots near or higher than 40% and the 200sma reading continues to fly high. That is the current setup to watch for. If that fails, then a larger change might be in the works, but if this is just another dip and you have been waiting for it, this is a good way to increase equity exposure on pullbacks. Longer term investors should be monitoring more closely and tightening stops on big winners while players of all time frames (especially short term traders) should be watching for a pivot low in the 20sma reading according to the setup mentioned above for any new entries.
Breadth Thrust Indicator the weakness played out here as well. Not our favorite topping indicator, but does a solid job on bottoms. Therefore, we are now looking for a pivot low, and if it can be at an extreme, the more the better! This very short term indicator is best at extremes, but many signals so far this year have come from where it is right now. Either way, a pivot low here should be ignored by the fast money guys. The divergence played out and now nearing recent pivot lows, but still room before extremes, but not absolutely necessary it gets there.
Percent Days after last week’s reminder that extreme days do actually happen from time to time, Friday we almost made it to a 90% down day for the markets. Okay, it made it with rounding…close enough. These types of days usually come closer to a short term bottom than they do a top when we are in a strong trend. That said, when they don’t signal a bottom within a few days and more heavy percent days show up, it usually gets ugly. Being the big day was Friday, no way to do anything but be on alert (common theme) for what happens this week. The 90% day we saw on Friday should be a great clue to where we really are in this trend, but only the action this week will reveal the message.
Summary: We saw fear crop up at the end of this week, but too late to make any big revelations. Fear can often be an event that ends up a blip on the radar a couple of weeks out. It is when it persists that we should worry. Warning flags went up in many indicators this week, so continued deterioration in the coming weeks would tell us that fear is setting in and might stay a while which can be a problem. However, the short term breadth indicators are nearing oversold and the reaction should be gauged closely for strength. If we can get strong pivots out of the lows, it should make for some great short term opportunities and is also likely to shore up the longer term readings.
Style & Size Relative Strength Rankings
From a broad perspective, we look at the RS rankings for the largest ETFs in each category.
Another week where Small Caps and Growth remained at the top of the RS list even with the rough action. Looking closely, we also see that Large Value and Mega Blend are sitting on the bottom of the list and had the worst weekly performances. This likely played into the performance of the benchmarks while not doing more damage to the breadth picture than we saw in the charts above. A more defensive posture would have those two bottom dwellers moving up toward the top and we don’t see that yet.
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 really did fine up until the end of the week with the exception of the Consumer sectors again. Those continue to show weakness. I will highlight Consumer Discretionary below to take a deeper look at where we are. Financials also ended weak after trying to perk up early. Overall, this hints of a shaking of the tree so far, but if I were to add anywhere this week based on this flow, it would be to those sectors rising the fastest recently like Real Estate, Health Care, Basic Materials and maybe even Energy as an outlier. Technology and Industrials remain solid, but after strong runs would like to see some life back in those lines first.
Broad Sector Moving Average Breadth this should give you more information than any other chart here. Short term weakness took hold at the end of the week, but watching for the setup mentioned above in sectors is also very valuable during pullbacks. For slow money, you need to be looking at the improving 50sma readings in areas like Basic Materials, Energy, Health Care, Real Estate and maybe even Utilities and then use the 20sma readings for better entry.
Broad Sector McClellan Charts we are seeing similar intermediate dispersion here with the broad sectors and can use the Oscillator extremes for entry points. It seems the same sectors are emerging here in recent weeks as well. Notice Industrials and Technology Summation indexes gave sell signals this week which provides a little more confirmation of what those sectors were showing in the Advance Decline Lines. Unfortunately, Consumers and Financials look the worst here as well.
Broad Sector Breadth Thrust are finally starting to head down closer to the extremes we want from this indicator. It would be great to get those extremes Monday or Tuesday and reverse for a more solid signal. However, many are low enough at this point any pivot should be taken seriously, but also very short term.
The New High – New Low Differential is just not hitting extremes that would make us worry more about this indicator. Of course, sector readings will be much more tame than the entire universe, but so far a -8 reading out of Consumer Discretionary is the worst we have seen. Enough to put the sector under scrutiny (which I will do below), but not enough to scream rampant deterioration.
Finally, the sector world is giving us some differentiation to work with. This is where breadth can really help guide where you focus your efforts. Depending on your trading style, there are great opportunities to focus on in here. The longer term investor can focus on emerging trends like Real Estate, Basic Materials, Utilities or continue to focus on better entries to strong sectors like Technology, Industrials or Health Care during these pullbacks. The shorter term trader or fast money should be focusing on oversold extremes in short term indicators and then potential shorting opportunities if the bounces turn out feeble. I can’t even begin to cover all the ways; that will depend on your trading style, but one thing I do know is less correlation opens us up to great sector opportunities when comparing to the broad market benchmarks.
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 major indexes pulled back this week, but the structure of the sector relative strength scan constructive and kept the heavier weighted sectors near the top of the RS list. It is worth watching for changes here, but not there yet.
Consumer space rolled hard this week after mentioning it was concerning last week. I also suggested the markets could continue to move higher if business spending took up any slack from the consumer which we are due for. Consumers can still be a drag, but not necessarily an anchor unless it decides to take Financials with them. If that happens, it gets more worrisome. In the short term though, these sectors are getting stretched to the downside, so shorting them before analyzing any bounce from these levels does not seem prudent.
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. Speaking of strongest feeding lanes, check out this new subsector view I created this week to show where participation is moving to and from. 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
Financials started the week off with some kick, but rolled over hard to end it. If that continues, it will be hard for the equity markets to thrive, so watch closely. This week let’s look closer at the Consumer Discretionary sector.
Here we see the sector breaks down into eight subsectors of various sizes. Below you can see how they stack up versus each other in RS.
Autos and related business have been a staple here for a while now and are back at the top as Durables are performing better than other discretionary items right now. That said, Entertainment also remains pretty solid. More of the weakness has come from the Retail names including Apparel and Leisure Goods. A good bit of this is in anticipation of a slowing consumer. This has been expected for over 3 years now, but maybe it is finally here. Things like tapering, higher interest rates and unusually cold weather have been the reasons this time. Last time, it was things like economy rolling over, sequester, lower unemployment benefits, low paying jobs, etc. My point is there is always something, so let’s stick to the data to see how bad it really is.
The Advance Decline Line after a strong run, the indicators long term trend line was broken this week while price ended testing its line. A reversal from here could save the price line, but the best we could hope for on breadth is to hold the horizontal support line before making a lower low. That would be a positive, but the AD Line trend break suggests a change in sentiment that could last a while.
Percent Days are more frequent when dealing with sectors, but should still be watched when extreme, and Friday’s readings were extreme. This is why I would NOT short this sector early next week. As you can see by the arrows, previous such readings have been very close to short term bottoms. So, if anything maybe playing for a scalp while everyone screams sell is more appropriate.
The Breadth Thrust Indicator similar extreme here. I marked all the previous extreme pivots here and in the subsector charts below. They seem to work well in recent occurrences.
The McClellan Indicators are not showing strength at all, but the Oscillator, not unlike the Breadth Thrust above, looks near an inflection point that has marked many short term bottoms on this chart.
The Moving Average Breadth reading is nearing the next signal down from the setup mentioned in the Universe breadth. This one is made up of both the 20sma and 50sma turning up from under their low lines (oversold) and the 200sma readings holding near 50% or better. This signal should be taken with more caution and focused more on scalps to swings to begin with. If those 200sma readings don’t pivot back up early in the bounce, tighten stops and don’t expect too much relief before more down. This is a critical zone for differentiating support for the trend.
The consumer has been a stalwart over the last few years and helped the markets get where they are today even among all the skepticism. We also always hear how the consumer is 70% of the US economy, so we certainly don’t want to see them rollover hard. Currently, money is in the early stages of flowing out of this sector. It could turn out to be a canary or just short term fear getting the best of investors. Only time will tell which it really is, but right here, right now, the sector and subsectors look to be getting pretty oversold and any relief from here will help gauge where we are in the cycle. If that fear subsides quickly, the trend should remain intact. I have also posted all the Consumer Discretionary breadth charts on one page so you can review them in the same layout as the subsectors below:
Here are the Consumer Discretionary ETF RS Rankings:
For those who would rather dig into the individual holdings, below I have the top and bottom 40 RS ranked names in the broad sector. I know many are looking at this sector as a shorting opportunity, so I thought I would share the best and worst this week.
If you want to dig deeper into the Individual RS Rankings by sectors and subsectors, they are here with FINVIZ links for easy chart review. 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)
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