January 31, 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
The markets roiled the chance to break out this week with a vengeance. Going into last week there were some good arguments for why the markets might be ready, but as markets often do, they decided to take a different course. The week on it’s own was solidly in the red negating the positive swings we saw last week that I thought could help, but the move didn’t have enough juice to push us below the current support levels. It did usher in a negative month, so we can look forward to hearing about the January effect ad nauseam, but seems to me the immediate support zones are more important than year long seasonality. Let’s not forget that last year was a negative January, and in fact we bottomed on February 2nd. I am not saying it will happen again, but it does make a little sense to take profits on winners in January after a strong year. I will look for the aforementioned support zones to be broken decisively (more than a day or two) to change my view of one solid push by bulls before anything really bearish materializes. This is why my theme for this week is Stuck in the Middle Again. The lyrics even remind me a little of where we are right now.
We see this when we look at the Intermarket RS rankings with all the equity indexes sitting right in the middle. Having $TLT and $UUP at the top of the list has dampered things for a while, but now with $GLD sitting up there with them, it is starting to look like fear is getting a good bit higher than sentiment indicators are suggesting. Sentiment surveys are great, but looking at where the money is actually flowing gives a good idea of how investors feel. So the Intermarket RS rankings is cautious, but not yet turned bearish. The dichotomy here lies in the comparison to the Equity Size & Style RS Rankings which are still favoring Small to Mid cap companies and also continues to lean towards Growth segments. This just doesn’t jive with the onset of a bear market so far, and until that changes (which may happen fast, who knows?), then we need to keep our imaginations about how deep the downturn should be in check. We are very near multiple potential support zones, so see how those play out before you throw in the towel. Caution is fine, but outright bearishness is still premature at this point. You should have a plan if they break, but patience is key until that materializes. On the other hand, buying support, with tight stops if lost, can be a great way to play longer term uptrends.
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
Looking at things this week, I would say that market breadth slumped. I like that term because it wasn’t aggressively negative, but it did remove some of the positives from last week and added a few to the negatives making them much closer to equal which reduces any current edge this week for either side.
1. NHNL 10sma and 30sma are not only positive, but still rising as it dips into negative.
2. Advance Decline Line only saw a minor reaction this week.
3. Price has not violated the right shoulder of the Inverse Head and Shoulders pattern.
4. >80% Days are 3:2 positive year to date even with the difficult environment.
1. Moving Average Breadth are hanging out near 50% levels and having a hard time surmounting them.
2. McClellan Summation Index was rejected at the signal line this week.
3. No upside follow through from last week’s breadth positives.
The big change from last week is the enthusiasm for upside potential has been diminished, but the changes in the readings above are not enough yet to flip to a more bearish outlooks, here too we find ourselves stuck in the middle again!
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
Sector breadth followed the markets this week tampering some of the potential signals we were discussing in last week’s report. Many stalled, but did not turn tail and run which keeps us watching and waiting for resolution. It is worth noting that Energy breadth continues to show small improvements and are worth keeping an eye on along with other commodity sectors. Might as well watch the $UUP too because I think we will need to see it cool off at least a little to kickstart the commodity space. The rest of the sectors are pretty self explanatory. Interest rate sensitive have been the strongest with Bonds running, other defensives are next, cyclicals come in the middle and commodities are trying to pull themselves off the mat.
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.
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
I mentioned last week that we might be starting to see another rotation, but it was early. This week continued to show some of that, but most areas were sold. There were only 5 of the 49 Subsectors I calculate that were positive on the week. During the month it looks like Financials and Technology subsectors took the biggest hit in RS. The biggest RS Gains seem to be coming from a potpourri of various subsectors like Precious Metals, Household Durables (Home builders etc), Semiconductors, and a resurgence in Biotechnology after falling in RS to end 2014. This tells me trying to follow major sectors themes is more difficult right now and one needs to step down at least one level and look at subsectors for direction and opportunities if not all the way down to individual names. For those not as comfortable with picking individual stocks, these days there are plenty of specialized sector ETFs and you can find them on the Sector ETF RS Page.
Final Note: I went into last week enthusiastic about the opportunities and the markets had a different idea. No big deal as it was only one week and didn’t really change the overall landscape a lot. I am coming in a little more cautious, but will keep an eagle eye on the support levels to see how markets react as we hit and potentially pierce them. I used that word specifically because to me the support must break to change my view, just piercing them will not do it. If they do actually break down this time (couple of days close below), I am more inclined to be a believer this time at least in the short term. If they don’t break here very soon, I think it could be an important message for the short to intermediate view putting the support buys (with tight stops on close below the broken levels) back on the table. Until then, we find ourselves Stuck In The Middle Again!
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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