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Macro Relative Strength
So, when it was all said and done, Santa may have come to your house, but his pre-Christmas visit to Wall Street was shortlived. In fact, the entire month of December was a pretty big disappointment with the ONLY green in either of the lists over the last month being $JJC. Yes, Copper actually put in a solid month while still having the 3rd worst return for the quarter on the Intermarket RS List. A strange month and year on many different levels. I won’t go into those details as there are many like @RyanDetrick , @SentimentTrader and @Bespoke who have posted plenty of market statistics showing this was truly an odd year.
That said, this week in these RS lists, we actually saw a little structural improvement which surprised me a little, but could turn out a good early hint we may see some improving action early year. Of course, this is based on relative strength rankings, so it could just be the least negative, but I am not looking for that at this point. In the Intermarket RS list, $IWM finally moved back into the top half of the list with the other three equity proxies sitting at the top. The improvement in the Size & Style list was not as pronounced, but we did see most Growth segments moving higher with $IWC & $IWO making the largest jumps. Seeing these types of improvements in weak markets tends to be favorable for the markets and suggests to me we may have a decent January ahead of us. With the $SPY $QQQ $DIA only a few percent off their highs at retest or potentially penetration, it wouldn’t surprise me if we see some early buyers. The question is where will the want to put their capital?
Sector Relative Strength Rankings
First, I look at the Custom Indexes that I use for all the breadth work to 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 tradeable 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.
Dropping down to the sector level, there are few bright spots, but when you get down to the Subsector level, we see a few more opportunities. From a broad sector perspective, Consumer Staples and Utilities saw some green showing the defensive edge. But when you drop down to the all sector ETF scans, 15 of the top 30 were green with Alternative Energy ETFs as the standouts. However, as I mentioned above, looking for RS gains in a weak market can help spot the next set of leaders if the markets do perform; and currently Health Care, Real Estate and Basic Materials are starting to stand out on both the sector and subsector levels. Of course, Energy Pipelines made a big jump, but still only sit at 30, so there is plenty of work to do there and the rest of the sector is not catching on yet, so it will be a tough road to hoe if they don’t wake up soon. Overall though, these RS Gainers during a weak tape are the areas I will be focusing on this week for new opportunities, but we still need to see other large sectors like Financials, Technology and Industrials get some footing or the broader markets will remain weak.
Broad Market Breadth
Universe of 3,300+ 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.
Even though the markets lost ground this week and the Major indexes gave back a good bit of the gains from previous week, the breadth readings did not get hit that hard. Actually, much of the breadth gains from last week’s surge were maintained.
- All of the short term divergences we discussed last week were not negated with the weakness end of week.
- NHNL Differential finally saw some positive days over the last two weeks improving the moving averages as well and getting them closer to turning positive.
- Moving Average Breadth readings did not give up much ground with this week’s weakness.
- McClellan Summation Index is crooked down, but holding the buy signal so far.
- McClellan Oscillator closed the week negative as a short term caution.
- NHNL Differential, Advance Decline Line & %>200sma all still very depressed and weighing on things until they start seeing some improvement.
With all of the Breadth divergences still in play at the moment, the only real worry I have on this level right now is the McClellan Oscillator pushing negative, but that can be changed quickly. We just don’t want to see it continue down as that would shift the Summation Index back negative which would not be a good sign at these indicator levels.
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.
The only 3 things I will point out here this week are:
- All of McClellan Summation Indicators ended the week still on buy signals.
- Most of the NHNL differentials look to be improving.
- The Energy Breadth Thrust Indicator ended the week pointing higher with the McClellan Oscillator ending above zero there.
Don’t forget the Breadth Compilation Charts allow you to view all the relevant breadth indicators on one chart for each sector as well as the entire universe. One thing to look for is when breadth extremes line up in multiple indicators on a chart.
Final Note: December was very disappointing I must admit, but I want to see if we get anyone buying as we start the new year before moving into the bear camp here and am likely to give it the first couple weeks to decide. Breadth is not deteriorating more here and actually seeing some improvement along with much of the Macro relative strength gauges. It is subtle, but that is what I see right now and will give the new year a chance for a fresh start, but don’t expect too much of a leash if the subtle progress under the hood doesn’t continue.
Happy New Year!
G. Thomas Lackey Jr, CMT CFP® CFS
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