January 5, 2014 Strength In Numbers
Welcome back to Strength In Numbers third edition. It seems we all like the web format better, so I will go with that again this week; but since it is the start of the year, I will lay out a good bit more data in the Relative Strength link pages so we can have a good record of where we started. I am keeping this report password protected even though it is free while I am in the beta stages. This will allow me to get a better idea of my readership to help design this service better for those who will actually be likely to use it. I fully understand that it has to add value to your weekly homework or it just becomes noise. I believe it will show this real value even more once we see some dispersion and volatility in the marketplace. It seems I am not sophisticated enough yet to hide all the pages, so I will only password protect the actual report so hitting each link does not call for a new password.
For more background on this report, the Strength In Numbers ppoint further explains what I am building here. Last week’s report can can be read here.
If you just want the highlights for now, check out the Executive Summary.
Getting started with the Intermarket RS Structure below we can see that equities are still leading and there is a hint of the barbell structure we discussed last week; Large Caps climbing into the end of the year, and Small Caps doing well because the markets are still showing strong breadth. That said, equities are still leading even with the down week.
The only thing that gave ground this week was Crude Oil while the US Dollar gained some ground. This is a normal relationship and so far is not effecting equities much. I still like this structure fine, but Oil could be an early warning if it falls out of bed from here.
Universe Breadth
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 remained positive this week even though it did droop a bit more. Not a problem for now. If you check my stream this week, you will see where I pointed you to some great work by Chris Perruna on the subject. Oh yeah, you can also click the link above and get there too. I will be writing more about this in a separate piece highlighting not only the indicator, but how the cleaner data in my universe improves the signals.
The Advance Decline Line crooked down with the market weakness we saw, but nothing dramatic during the holiday week. So, I decided to pull back a bit and show you why I don’t look at the rally as starting in 2009. I see it as 2011-2012 start. If you look at this price weighted custom index of my universe, it was sideways for a really long time. A large base of sorts; while the next chart shows the same AD Line over the $SPY that continued to make higher highs.
That suggests to me the markets were basing most of 2010-2012 depending on the sectors. The current leg is just a very violent reaction to all of that pent up energy under the hood. If I am right, we can go much further before needing a cyclical bear market to interrupt.
The McClellan Summation did not waiver this week during the weakness. It does not surprise me due to the thrust we saw coming off the bottom. It is a moving average based indicator, so once it turns, it takes a minute to turn back which is what you want from an intermediate measure like this. The McClellan Oscillator is the short term reading and it did roll over and is showing the beginning of a divergence, but again a very short term signal. If we see more weakness, these indicators will be a key next week.
The Moving Average Breadth readings are just fine. We do still have a longer divergence in the percent above 50sma we are watching, but it is at the upper region line, so give it a few days to see how it reacts. The other two measures are in a good place. The 20sma reading will start giving ground fast if we are ready for the next pullback, but it can also get embedded in the upper region in a strong trend, so don’t play that “too high” game. It often doesn’t work.
The Breadth Thrust Indicator is the one that might be forewarning more short term weakness (if one of them has to be the bad guy). It does have a sharp shorter term divergence sequence starting. I say sequence because these can diverge multiple times in very short period. Also remember, this is a much much better indicator for lows than highs. So far, it looks normal to me, just want to point that out.
Finally, we end with Percent Days which haven’t been a factor for a while now. That will change at some point, and when it does, we will see it.
Summary: It was a short holiday week that also crossed over a new year. Don’t expect too much or read too much into it. We will start seeing more action tomorrow and if something is changing under the hood, we will get a whiff of it first right here. Stay with the trend as long as the breadth stays this strong.
Style & Size Relative Strength Rankings
From a broad perspective, we look at the RS rankings for the largest ETFs in each category.
Like I mentioned above, we see the Barbell theme in full effect in this view. I believe now that the end of the year is over, the large caps might fade back a bit, but Small Caps can continue due to the strong breadth. Small Caps also have seasonality at their back for a few more weeks as well.
Broad Sector Breadth
This view 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 Advanced Decline Lines continued to look pretty healthy although flattening some this week. As long as we don’t see big drops on down days/weeks, it is normal ebb and flow. Basic Materials, Health Care, Industrials, Real Estate, and Technology were all marginally positive for the week. We will discuss Real Estate more later. When you click the links or the Dashboard and go to the sector chart page, you will see I took a longer term look here to start the year. I also marked up all these charts. Note how many long bases are on these charts before the rally that started last November. Those are big breakouts in my book.
Broad Sector Moving Average Breadth look fine to me; again, I believe this is one of the best ways to look at the broad sectors on multiple time frames.
Broad Sector McClellan Indicators are also still painting a picture that we made a low in recent weeks; how big of a low is still to be determined, but there are some good looks here.
After all the crosses we saw last week, I think it is way to premature to start worrying too much.
Broad Sector Breadth Thrust weakened some this week with the markets which is to be expected, and I stress again that this indicator is better on pivot lows than highs. I felt it was worth showing because we are starting to see some divergence patterns that can accompany weakness. We just aren’t seeing it many other places right now.
The New Highs – New Low Differential charts did get a dashboard this week, but that is about all the excitement there for now. The link above will take you to its chart page.
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 trade-able 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. Start the year off looking deep and also show some of the components of the next level to this research.
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. The subsector world is starting to move around a bit, but no big warnings that I see for the broader picture yet.
Sector Drilldown
Last week we covered Basic Materials, which is coming out of a long base and continued to improve this week. Precious Metals even joined in which was a big help. This week we will look at a sector I believe may be bottoming after a sharp correction. Real Estate was on a strong run until earlier this year when Interest Rates became the topic on everyone’s mind, and since then the sector has languished. Real Estate is unloved to say the least, but now with the Taper uncertainty behind us and the economy moving forward, is it time for some pressure to come off?
You can see the breakdown above, and the Subsector Relative Strength below to see how things stand inside the Broad Real Estate Sector.
Retail and Diversified seem to be the two dominant sectors recently. Commercial has started to slip while Residential & Mortgage seems to be coming off the mat a bit. We all know Residential & Mortgage has taken the most heat since the drop started and it is still very early; but if my theory is correct, it would make sense that this area would make the strongest relative move. So, what makes me think this sector might be ready to start performing? Let’s look at the breadth charts to see.
The Advance Decline Line has been in a long down channel since the Spring when this all began. However, you will also notice the larger term uptrend in the indicator is still intact and the last two down moves did not reach the lower rail of the channel. The shorter term view you can see we broke the immediate downtrend in the AD Line I spoke about on the stream a few weeks ago and now is headed for the upper rail of the channel. All of this going on while price seems to be bouncing from an important level on the price weighted custom index as well.
Percent Days seem too prevalent to be taken for anything except on the shortest of time frames. I am not sure how effective this indicator will be on the sector level due to the lower number of holdings in the measurements
The Breadth Thrust Indicator has an interesting message. It has shown much higher lows in recent down legs accompanied by a divergence right before the last low. I like the way this indicator looks with this price action. Friday’s high Pivot with price trying to come out of a flag is worth noting.
The McClellan Oscillator is also showing this higher low pattern pretty dominantly while The McClellan Summation Index is heading to the upper rail of the triangle that just happens to correspond with the flat-line. A move over that would be good confirmation of a potential bottom.
The Moving Average Breadth readings are screaming in the short end, but what we need is the long end to start reacting more. We are not there yet, but the longer measures will start moving soon if we are in fact coming out of a base.
There is still a lot of work to do here, so expect volatility and pick your spots carefully. If I am wrong, stops should not have to be too far away since we are near lows in many cases. Below, I have links to the pages for the subsector breadth charts:
Like I suggested above, if my theory is correct, the largest relative move will likely come from the Residential & Mortgage space; but if you want charts that look a bit stronger short term, you might look at Retail. For those who want in, but are more timid, head towards the Diversified subsector as it has held up the best during the weakness.
Now that we have seen that we move to the Real Estate RS Rankings.
This should give you some ideas of where money is flowing here before delving into the individual holdings below. First, we start with the Top 20 in the broad sector measurement.
This definitely shows the Retail holdings are making a move. If you want much more on the RS Rankings of the Real Estate sector and subsectors, click here.
If you are not excited about the Real Estate sector, then move back up the the broad sector review and dig a little deeper, especially in the sector ETF section. There are plenty of solid ideas in there depending on your style. Whatever you do, don’t stop looking for opportunities, they are definitely out there.
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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