January 4, 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
After seeing the Santa rally swoop through Christmas week, it unfortunately seems some were not happy with what they got and we saw a bunch of items returned (or sold) in the current week. With it being a holiday week and the end of the year, it would be foolish not to take the low volume into consideration which lessens the impact a bit. I have mentioned before that we seem to be seeing more reversals (even if short term) around holiday trading in recent years. Thanksgiving has seen the most, but maybe it was Christmas this year. We really won’t know the impact of this reversal until we get through the next week or so when everyone comes back from vacation and starts implementing their newly minted plans. Don’t read too much into it yet. When we move to the RS data, we can see we have reverted back to where we were in early December with all the Equity proxies still in the upper half of the list, but tempered by having $TLT and $UUP up there as well. If you look closer at the $IWM small caps chart, you can see that we didn’t even give up the entire Santa rally. The issues were more concentrated in the larger names, which naturally will have a bigger effect on market cap weighted indexes. This is a big reason I will look at alternative indexes (namely the ones I created) and market breadth to get a better gauge on what’s happening. You can see this Large cap underperformance well when looking at the Equity Size & Style list where you will notice there was a complete reversal of strength during December. The year ended with a thud after the December run higher, but there is not enough evidence yet to read into it. The coming week will have more tells for us and also should be a good place to watch for continued rotation. It seems to already be taking place in the different equity segments. I will be watching for more of it to show through in the sectors soon.
Universe Breadth
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
The Advance Decline Line
The McClellan Indicators
The Moving Average Breadth
Breadth Thrust Indicator
Percent Days
The breadth world did not see much damage as we went through the week. From a price perspective, the chart is showing us the potential for a failed breakout of the Inverse Head and Shoulders pattern, but remember, the pattern is not negated until a close below the right shoulder. With that said, let’s look closer at the breadth side. Below I list the current positives and concerns that I see going into the new year.
Positives:
1. NHNL differential is postive and was relatively strong until Wednesday where it basically went flat. All 3 pieces of a potential sell signal are reset going into the new year.
2. New 52 week lows are not showing any signs of life as of yet.
3. The Advance Decline Line made a higher high (albeit not a high for the year) before softening for the first time since June of this year.
4. The early December breadth extremes lined up and provided a solid thrust into last week.
5. McClellan Summation Index turned up from below zero (giving a green arrow) and confirmed with a cross of the signal line as well as the flatline.
6. Percent Days chart shows there has been no real pressure on either side (selling or buying) since the mid December reversal which saw both high selling pressure followed by strong buying pressure days line up. This is a good sign for a durable intermediate bottom.
Concerns:
1. McClellan Oscillator and Breadth Thrust Indicator saw strong thrusts off the lows, but have stalled and reversed below previous peaks. This could end anytime, but shows less vigor by the bulls at the moment which could be just holiday malaise, but worth paying attention to in the short term.
2. Moving Average Breadth readings all saw a pivot down last week without reaching the upper quadrants. Hiccups happen, but if any other than the %>20sma get below 50%, my concern would rise.
3. The %>200sma has not seen its upper quadrant since early July, a cross below 50% or break of the December low value would raise a red flag.
As you can see the positives still outweigh the concerns pretty well at the moment. It is interesting that the concerns lie on opposite ends of the spectrum while the Intermediate indicators still look fine for now. The biggest concern is 3, but that indicator lagging makes some sense with the Broad markets sideways action we have discussed all year in our reports. The large cap indexes this year masked a lot of the market internals; it will be interesting to see if 2015 brings the opposite with the small and midcaps coming back to life while the large caps slow. This could possibly usher in a time where the major indexes underperform while the action under the hood remains solid and the “rest of the market” provides solid relative strength like we saw in December. If this happens, it will provide plenty of opportunities that might not show up much in the $SPY or $QQQ. It would also provide some respite for those active managers that have struggled in the recent years… If they are really active managers and not just closet indexers.
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
Broad Sector McClellan Charts
Broad Sector Breadth Thrust
The New High – New Low Differential
Since I don’t want us reading too much into the last two weeks, I won’t go too deep into the analysis this week. However, there are a few indicators we should be paying attention to that should help us get some sector guidance going into 2015. With the markets are losing their footing a bit, the two areas I like to concentrate on the most are the Moving Average Breadth readings as well as the McClellan Summation Index. For the MA Breadth in these circumstances I get a gauge on where the long term measure is, but focus much more on the two shorter measures. This can tell us which sectors are taking the brunt of the weakness from a participation standpoint. For this example, I will use Consumer Staples which many have been hot on lately and price is still holding up okay, but take a look above at the %>20sma and to a lesser extent the %>50sma which saw as big a drop in the last few days as any sector we follow. That makes us take note, and then we move over the the McClellan Summation Index and notice it crossed down below the signal line Friday (slightly) forging a noticeable divergence in the indicator which adds to the warning the MA breadth is showing. This also came with an 80% down day on Thursday. The second example I will use is the infamous Energy sector which is the one everyone loves to hate right now. This sector has shown very little giveback in the %>20sma which is close to 70% to end the week. Of course, looking at the two longer MA breadth indicators that are still anemic as can be, this could just be another dead cat bounce. So, to help get a better read, we move over the the McClellan Summation Index and see it has forged a large divergence and has turned up from below zero for the second time in the quarter. As I posted a couple of weeks ago, these divergences below zero have very solid track records of trade-able bottoms in the past. I would also point out that in Energy (and Basic Materials which also lagged big the last 6 months) the New 52 week lows have all but disappeared after surging recently. These sectors still have issues to work through, but opportunities are starting to set up for those who can tune out the noise.
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
Top 30 Sector ETF RS Rankings on FINVIZ
Bottom 30 Sector ETF RS Rankings
Bottom 30 Sector ETF RS Rankings on FINVIZ
On the RS front, we are still seeing the markets readjust as they always do. The biggest thing that jumps out at me in recent weeks is improvement in Financials while Health Care continues to lose relative strength while holding up okay from a pure price perspective. Health Care has been on a long and strong run that I don’t believe is ending any time soon, but a rest is certainly possible and probably healthy to set up the next leg. That rest can either come in the form of a pullback or sideways movement. An old technical adage that says corrections often alternate in form might suggest more of a sideways move since we saw a deeper pullback in early 2014. Of course, this is just an old adage, so we will take price and breadth action as our guide.
Final Note: Another short holiday week has come and gone, but didn’t treat us as well as the first. The selling did forge some distribution days, but on very low volume overall. This makes it harder and less ideal for getting a clear message from the markets to make decisions on. I prefer to wait and see how the next week or two shake out to get a feel for the potential of the current broader rally or the minor reversals we saw in recent days. Don’t forget the longer term indicators are still holding okay and the intermediate term indicators forged bottoms in December which should keep us leaning to the positive side on anything but the shortest time frames for now. Pullbacks remain opportunities until the large picture shows more change.
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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