July 12, 2015 Strength In Numbers
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For more background on this report check out Strength In Numbers Explained. Previous reports can be read here.
Macro Relative Strength
After falling last week, equities continued on that path to start this week, but they had erased most of the early losses by the end of the week. It wasn’t enough to turn them all positive, but we will take it given the dire look early on. The major equity indexes looked like they had lost the current ranges and might be ready to extend to the downside, but once again, fear cropped up quickly and sent too many people to one side of the boat. Once everyone had decided it was time to step aside, the markets quickly became oversold enough to start a rebound attempt. It took most of the week, but we closed with a reversal back higher taking shape. Nothing performed very well in the Intermarket RS list; the big standouts were $USO & $JJC which took big hits dragging down commodities in general.
In the Intermarket list, Equities are scattered but remain in the top half where we want them to stay, but certainly not showing much if any leadership here. Moving down to the Equity Size & Style, we are starting to lean back towards the smaller names again. Growth is still also slightly favored as well. Here again, the list does not have a clear structural bias. Another week without much change to the structure showing the markets are still undecided on these two measures.
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.
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
Consumer Staples, Utilities and Real Estate were your top performing sectors this week. The big surprise might be that Consumer Staples is the top performer over the last month. That doesn’t exactly scream confidence, but shouldn’t usher in despair either. Actually, 6 of the 10 were positive for the week looking a little better than the major indexes. The defensive nature of this week goes along with the recent fear. The more cyclical sectors took the biggest hits early, which should be watched, but many also saw the largest rebounds off the lows. We can tell buyers are still lurking by the quick snapbacks we see, but they need a reason to get engaged. Some perceived resolution could possibly bring them back to the table. If not, we will be on alert for another leg down this summer that could result in a full correction.
Broad Market 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 technical and breadth damage was palpable last week, but this week we saw more stabilization than anything. We didn’t fix it all, but there were a few things in there worth noting.
Positives:
1. NHNL Differential diverged on the last move down, but will take a big shift to keep 30sma in positive territory saving us from the 3rd sell signal in that sequence.
2. %>50sma & %>20sma both bounced after touching bottom quadrant.
3. Breadth Thrust saw a nice move after the double dip into extreme readings.
4. 80% Down Day was followed immediately by some relief.
5. Custom Index is backtesting the Inverse Head and Shoulders breakout from February.
Concerns:
1. NHNL Differential can’t lose any more ground or 30sma will go negative which is a long term sell signal for this indicator.
2. Advance Decline not recovering quickly.
3. McClellan Summation Index still looks sick.
Even though it looks like the positives outweigh the negatives above, it is still a very difficult read here. There are good arguments on both sides and the bears are making more headway than they have in a while, but that is always how it feels near a short or long term bottom. With the reversal action we saw this week accompanied by the nice thrust in short term breadth measures, we could have forged a tradable bottom this week, but we do need to see more follow through early week or we will likely see a swift retest and possible break of the recent lows.
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.
Broad Sector Advance Decline Line
Broad Sector Moving Average Breadth
Broad Sector McClellan Charts
The New High – New Low Differential
Clicking on the highlighted links will go to a page with the dashboards for the Subsectors.
Last week, we talked about the damage we saw in many sectors. That continued at the start of the week, but caught a bid when things started to change. Above you can see how much of that played out, but if you want to know which areas got most of the action off the lows, the Breadth Thrust Indicator page (click on the Dashboard above) can show which sectors and subsectors saw the most powerful breadth reversal once things started shaping up. Utilities and Real Estate stood out this week with some thrusting action which actually started showing up last week. Another example would be Technology which saw many subsectors thrust out of the midweek lows. If the sector is really improving, once the thrust off the lows is wearing off, then we can start to watch the specific Summation Index to make sure it is following suit.
That is just one idea of how to use the breadth action as a trading signal as well as a guide. The breadth picture has become minorly washed out pretty quickly showing many were indiscriminately looking for the exits recently. If they perceive they were wrong, a rush back in can cause the thrusty action off the lows we often see. What happens next is where the real information is found.
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: The first a few days off a breadth extreme reversal and can be profitable for the most nimble out there, but for most it is best to look for those reversals and monitor them for returning/emerging strength through both breadth and relative strength measures. This won’t protect you from all the markets tricks, but does help keep you in the flow which goes a long way. These markets have not given a clear message for a month or two and are wearing people down at this point. That doesn’t mean a major top is imminent, but it is smart to have that scenario in your playbook just in case. Overall, we are still in the range and believe the markets are showing good resilience in recent days, but we must build on this or more corrective action will take hold quickly.
Have a great week!
G. Thomas Lackey Jr, CMT CFP® CFS
Follow me on StockTwits and Twitter @gtlackey (All market data above are derived from Stockcharts.com, Esignal, and Reuters Datalink)
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