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Macro Relative Strength
Impressive week in the Majors with $QQQ busting through resistance with a 5% week. Nothing else even came close. It is not hard to see why with solid weeks from Tech and Biotech. It seemed to catch many off guard. This action helped shore up the Intermarket RS lists moving all the equity proxies up in ranking and now comfortably in the top half of the list where we want them. Commodities continued to be the whipping boys this week as the $UUP ran to the upside putting even more pressure on them. This all while $TLT turned in over a 2% return just to keep things interesting. The flows between these different asset classes have not been very smooth lately telling me there is still a good bit of consternation on where we go next, and that wall of worry seemed to be good for equities this week.
Dropping down to the Size & Style, we see Growth continues to be the standout. This week with the Large Cap version taking the top spot, but Small Growth is next showing there is still action there. The cap weighting in these indexes certainly exacerbated the move this week catapulting Large Caps up to the top while other growth areas got the scraps. Value ended up with the crumbs. In general though, Small Caps did lag overall which is worth noting, but even more interesting to me is the $MDY sitting near the bottom of the list. Mid Caps are historically some of the best and most consistent performers, but looking closer you can see the commodity weightings in this middle tier index are the big drag. It will be interesting to see if that continues.
Equity Indexes took charge this week and moved all the majors back to the highs and send $QQQ through them. This sets us up to continue the major trend higher if the $SPY & $IWM can follow suit over the next two weeks. On a relative strength basis, both the Intermarket RS list and the Size & Style list are structured to favor equities still and strengthened that view this week.
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.
A quick glance at the custom index rankings above shows just how lopsided the week actually was by looking at the Subsector rankings. It is hard not to notice the 8.6% return in Biotechnology and the 7.2% return the Internet space. No other Subsectors returned over 2.45%. Of course, Energy and Precious Metals did their best to offset some of these gains with losing weeks in the 4%+ ranges, but didn’t have enough to pull the overall markets with them. Growth won again in these markets, but comparing the performances in the cap weighted indexes to the equal weighted or custom price weighted indexes of mine, it is hinting at a fairly narrow market which we will explore more below in the breadth sections.
However, if we didn’t have breadth to lean on, just comparing performance in sectors between these three measures can help a lot. Using Tech as an example, the first thing I notice is even after this week Technology is still in the middle of the pack when it comes to sector rankings behind Health Care, Consumer Discretionary and Financials. Technology did make headway in all the lists, but notice how much lower the equal weight Technology ranking is in that list giving a pretty clear message the gains this week came from the largest of players. In fact, this week most of it came from the Internet Subsector while the rest of the subsectors paled in comparison. This is not necessarily a negative, but should be noted when deciding how view the sector going forward. I believe the sector is finally getting some well deserved attention and am fine with it starting in the big names. It works well for cap weighted ETFs which I often utilize, but from an analysis standpoint, I will be watching for the equal weight version, sector breadth, and at least one or two of the other subsectors to pick up as confirmation of my view. If it doesn’t happen in coming weeks, it would tell me my thesis was wrong.
The action this week was more green than red in the Subsectors and sectors, but easy to see where most of the gains came from. Every market needs leaders, so this is a good sign for the overall markets as they are right back up testing another breakout higher. With Health Care, Financials, and Consumer Discretionary performing well and now Technology joining, we have the four horsemen of the sector world (largest by market weightings) out in front which bodes well for the potential of another leg higher instead of a major top.
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 price and relative strength action above is certainly enough to get people excited going forward, but taking a look at the breadth action below it is still a mixed picture. That said, if we are coming out of a malaise, it will clear up fairly quickly as we move higher. It is also worth noting that much of the drag is coming from 2 of 10 sectors, but it is making a dent in the breadth nonetheless.
1. NHNL Differential was strong enough to turn the 10sma up and kept the 30sma from going negative.
2. Breadth Thrust made highest reading since February.
3. McClellan Summation Index crossed the signal line while below zero this week.
4. 80% Down Day was followed immediately by some relief.
5. Custom Index successfully back tested the Inverse Head and Shoulders breakout from February.
1. NHNL Differential is showing a large number of new lows Friday pulling the indicator negative to end the week.
2. Advance Decline not recovering quickly and stalled most of the week.
3. MA Breadth readings are all stuck at the 50% zone even with the recent surge back to the highs.
The positives still outweigh the negatives on a breadth view, but the action we have seen during this fast move off the lows is somewhat disappointing. Not a sell signal, but does become more concerning the longer it takes to catch up. We should note most of the weakness is coming from a few spaces; it still needs to be monitored for overall effects it may cause. I think it is hard to be too bearish with the Summation Index turning up and signalling after two previous failing signals and accompanied by new highs in the Oscillator & Breadth Thrust Indicators. This shows there is some force behind the move, even if concentrated in certain sectors. However, it will need to broaden back out some to keep propelling us forward.
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.
Clicking on the highlighted links will go to a page with the dashboards for the Subsectors.
Few sectors making new highs in the Advance Decline Lines on the recent move. Consumer Discretionary, Financials and Health Care are in new high territory in this measure and are also our relative strength leaders. Coincidence? I think not. But as I mentioned above, Technology isn’t there and hasn’t been that impressive from a breadth standpoint on the recent move higher. This should be watched for improvement. Tech has been hanging in there over the last year, but hasn’t gotten the attention it deserved. This week might be starting to change that. The question is, will it be relegated to a few large popular players or does the whole sector start to earn more respect? With the huge moves in the marquee players this week, I expect there will be some who dig deeper looking for opportunities going forward. Adding Technology to the other three above puts the largest sector weightings at the top of the performance and participation lists for the entire market. If this persists, it will be very hard to break this market down.
Of course, I would be remiss if I didn’t also note the stark concentration of negative breadth readings in Energy and Basic Materials. These areas have been bludgeoned in the recent market action and are back to looking very oversold. As I mentioned above, the weakness in these two sectors account for almost all of the broad market breadth weakness we saw last week. The new lows were heavily affected. All this doesn’t suggest they will become leaders, but are back to breadth readings that are so low if they do get any positive spark, they could run hard for a while even if just a retracement. Definitely a counter trend idea, but we get those from washed out breadth, and these two sectors definitely qualify on that measure. So, if you have no interest in trading them, at least make sure you note and consider them when assessing the broad market breadth action we are experiencing.
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 markets continued to move higher and $QQQ took flight this week into new high territory. Yes, the outsized moves did come from a few names and skewed the action some, but it was still positive action on the whole. With $SPY & $IWM stalling a bit and not breaking out too, it may suggest a little consolidation here while they prepare for their moves. It wouldn’t be a bad thing to digest last week’s move a bit and set up for the next break or they could just keep running from here if they can build off this week’s strength. Don’t forget, we have been in a sideways market most of the year in a long term uptrend. If it decides to continue that trend action like this week, it could be just the kicker needed to get things going.
Have a great week!
G. Thomas Lackey Jr, CMT CFP® CFS
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