July 20, 2014 Strength In Numbers
*If you are not on the email list and would like to review the full report each week, please email me at gtlackey@gmail.com and I will add you to the beta list. Please include your Stocktwits or Twitter handle in the email if you have one. You will receive a weekly email with the password to log in to the report and any updates there are during the week. I do not share your email with anyone at any time.*
For more background on this report, the Strength In Numbers ppoint further explains what I am building here. Previous reports can be read here.
It was nice to have a few days away from the screens, but I have to admit, it did make me a little more worrisome with the markets bouncing around and not being able to see how they were looking under the hood. Let’s dig in and see how much things really changed in two weeks.
Macro Relative Strength
Click on either table for a deeper view including the Top and Bottom 20 ranked Broad Equity ETF and FINVIZ links.
Over the last couple of weeks we saw some shifting in the Intermarket picture with Equities (well most equities) moving back up the ladder, $QQQ taking back the top spot and the other Large Cap players just behind. $IWM on the other hand has slipped back near the bottom. During all of this we saw commodities soften some, partially due to the $UUP strength, but also was time for a rest after strong showings last quarter. The Intermarket picture is a little jumbled right now and does not give a clear message. Below that you have the Equity Size & Style which is giving a clear picture that Large Caps are en vogue and Small Caps once again have been shunned. This table gives a bit more of a warning, but Large Caps can lead for a while in a maturing trend. However, if this continues and the market narrows too much, we are likely to get that larger correction most have been talking about (for over a year now). Some warning flags as $IWM lags here, but it can play catch up as it has done before. $IWM ended the week looking ready to bounce, and it will be in that bounce that we get the memo whether this was just another bump in the road, or if it fails quickly we could be in for a larger pullback into August. The latter scenario does favor the larger names that are perceived as safer. We are not there yet though. Let the bounce attempt play out before making any major decisions.
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 saw 2 negative readings since the last report. First was -3 and this week we saw -19. The problem for the bears is there was no expansion after either one; in fact, both sprung back to positive the next day. These negatives are the first signal to watch on this chart. Next, we need to see the Moving averages move negative as well. Both are pointing down, but as mentioned it will take some expansion by the NHNL into negative territory to pull these down there as well. Once we see that, I will get more concerned.
The Advance Decline Line rolled over a bit and is now testing the previous breakout as well as the Trend lines on the chart. I will reserve judgement until we see this area resolve. The channel that the AdvDec Line has been in since early 2013 is still in tact so far.
The McClellan Indicators gave us an initial warning last week when the Summation Index crossed down. This is an intermediate time frame warning, but it needs to also fall below zero for larger implications. This is where the Oscillator comes into play. The Oscillator hit an extreme on Thursday that has been a good gauge that we are at or near a short term bottom. So with the short term indicator hitting extremes and the Summation Index still above zero, I would suspect that even if we do get another shot down (that might diverge the Oscillator), it could be hard for the Summation to get that last signal. If it does lose the flatline, it should be meaningful.
The Moving Average Breadth is giving us a lot to work with at the moment. We saw some definite weakening in the short and intermediate term values of the last couple of weeks, but the longer term read is still holding above the 50% line and the lows we saw earlier this year. This fits well with what we have already discussed in the first two breadth charts. The %>20sma came very close to getting into the oversold territory this week as well, but Friday set a new pivot low instead. I have noted before that every low pivot does not have to be an extreme and this very well may be one of those cases. Give it a little room early in the week, but if it shows some persistency in moving back higher (and the %>50sma goes with it), don’t argue. Friday could have been the signal dip buyers are looking for.
Breadth Thrust Indicator gave its first signal in a while on Friday’s pivot which is worth taking note. It can dive deeper or put in a divergence as price makes a lower low, but if the trend is to remain in force, then the low is likely to be sooner than later.
Percent Days finally showed some conviction by traders by putting in an 80% down day on Thursday, but to the bears shagrin, we got an 80% up day on Friday while putting in a nice reversal candle. My view on percent days is they are usually within a day or two of a short term bottom and can be strong dip buying signals as long as they don’t cluster too much. So far, we have one, so clustering is not a problem yet. If you look at this with the McClellan Oscillator, Breadth Thrust, and %>20sma readings, it gives you 4 short term bottoming signals together. Probably worth taking note.
Summary: The Universe has seen a couple of weeks of downward price movement that brought the short term breadth readings to or near extremes and ended the week with them all pivoting higher. This may just be due to OPEX, but we also can’t rule out that this may be the dip to buy. Every new market leg higher begins with a bounce. Let’s reserve longer term judgment until we get this bounce and the information it brings. It will need to show improvement not just in the short term readings, but also the intermediate ones like Summation Index and %>50sma. If this improvement does occur, the longer term trend (which has not been broken) should carry on for now. These markets have been notorious for rotating in the place of correcting, so I advise looking for where this money is rotating to instead of betting on it leaving altogether.
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. For the first three indicators below, if you click on each respective title or the Dashboard, it will take you to a page specifically for those sector breadth charts. I did not include pages for the Breadth Thrust or NHNL this week.
Broad Sector Advance Decline Line is certainly showing some softening over the last couple of weeks just like the Universe did. Technology, Health Care and Basic Materials looked the most dramatic. On the other side, Real Estate has been a standout here making new highs this week as this sector nears last year’s peak. With the Universe being soft here, I would suggest not reading too much into the weakness yet.
Broad Sector Moving Average Breadth ended the week giving some potential buy signals with the %>20sma pivoting from the lower line while the %>50sma stayed in the middle. This is the setup to look for opportunities. These oversold readings are great dip buying signals as long as your risk management is solid just in case this does start a larger correction.
Broad Sector McClellan Charts are giving very mixed messages. Many Summation indexes are bearing down on the zero line threatening to cross, but are not there yet. There are a couple worth taking note of that are either still well above like Energy or actually turning up like Real Estate, but many are looking similar to the Universe. Then we have the Oscillators which are mostly at oversold extremes. Unless this is the big one, these usually come near the end of pullbacks, so that is the way I am looking at it until that stops working.
Broad Sector Breadth Thrust is also giving some signals after a long dry spell. Health Care looks like the best extreme to me here and I like the divergence put in by Industrials. Once again, Real Estate didn’t even come close showing its current leadership.
The New High – New Low Differential did show a few negatives over the last two weeks, but nothing with expansion we should be worrying about yet.
The breadth began to waffle a bit more while I was gone, but so far on the sector front it looks orderly and is showing some rotation. If you are looking for strength, Real Estate is the standout here and there are plenty of options for dip buys if you are so inclined. Health Care seems to have been hit the most so far. There are enough extremes present to be looking for those dip buys, but keep the risk management tighter than normal since we are in the summer doldrums.
Sector Relative Strength Rankings
First, I look at the Custom Indexes and see what they are telling us on a price weighted basis. Click on either chart for a deeper view.
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, it will take you to a page that will go much deeper into the Sector ETF Relative Strength world including the Top and Bottom 30 ranked Sector ETF and FINVIZ links.
Summary: Since the last report, we have definitely seen some rotation. Energy has come off its highs a bit, but still holding pretty well on most lists. Real Estate is still a bright spot in my view. One I think is interesting here is Health Care. It remained near the top of the rankings for most even with the breadth extremes we are seeing. This could be a ripe spot for dip buying if markets cooperate in the coming weeks.
Also, check out this subsector view I created to show where participation is moving to and from. This is where the most focused ideas will come from.
Sector Highlight
This week we focus on the Financial sector. I was talking with Greg (@harmongreg) and Derald (@1nvestor) about it Friday and thought it was worth covering. Many use this as a market tell and have recently suggested the underperformance is a harbinger for things to come. My problem is I haven’t seen that much underperformance from the broad sector; it is a couple of subsectors that have been having issues. Overall, the sector has been quiet and may be ready to get back in the game.
The Advance Decline Line shows the broad sector has been in a sideways move for most of the year while the AdvDec Line has be stair stepping higher. Price is what pays, but this improvement under the surface can often lead price action.
Percent Days continue to intrigue me. The emotions here swing from one end to the other even with it being such a large sector. Unfortunately, intriguing does not equate into any significant signals.
The Breadth Thrust Indicator hit its first extreme reading since May, but at a much higher price.
The McClellan Indicators are set up very similar to the Universe with the Summation Index heading down, but above zero and the Oscillator hitting an extreme Thursday. Look for follow through on Friday’s pivot for info.
The Moving Average Breadth also gave a nice pivot on Friday after the %>20sma touched the low line. If it can build on this pivot, the signal looks decent as price is holding up pretty well.
The New High – New Low Differential isn’t showing much strength or weakness right here. From the looks of the chart, most of the weakness was ferreted out in late April. If we can go through the recent highs, I would like to see expansion up here to confirm the sector move.
The Subsectors view below shows the Regional Banks still the laggard as it has been most of the year. Most of the others look fine in relatively. Insurance has been the most consistent gainer this year and still looks strong.
This sector is a often a bellwether, but doesn’t have to be leading at all times for the market to perform. Actually, it has been basically sideways most of the year until it began to wake up in May. This is definitely one of those broad sectors that is worth digging deeper into the Subsectors to find opportunities. Below you can look at the Subsector breadth to get started and then dig deeper into the relative strength readings below that once you choose your fishing lanes.
I have also added a page with all the Broad Sector Financials Breadth Charts to view them in the same layout as the subsectors above.
Here are the Financials RS Rankings:
Subsector RS Rankings
ETF RS Rankings
Credit Services, Insurance and Investment Services are leading here and that is also where I see many opportunities. Regional Banks are dragging the bottom, but internally it is a mixed bag as there are definitely still some good looking charts inside it. With this being a sector that has been sideways for a while, I prefer to start with the strength and make the laggards prove themselves a bit more before looking there.
Top 40 Financial RS Rankings
Bottom 40 Financials RS Rankings
If you want to dig deeper into the individual Financials RS Rankings by broad sector and subsectors, they are here with FINVIZ links for easy chart review. Note larger Subsectors do not expand well for better viewing, so for those lists, I suggest using FINVIZ for closer examination once you have looked at the rankings on the main page. You may be surprised what you can find.
Final Note: It looks like buyers took a week or two off as well. It is not clear if they are gone for the summer or were just taking a few days like I did. At the moment, short term readings are flashing extremes and intermediate and long term are not even close. This suggests we are back in a dip buyers set up which we should continue to employ until it stops working. No one knows when the market will actually put in a larger pullback and, yes it is true, we are due; but try not to anticipate the outcome too much as this has gotten many ran over in the last couple of years. You can be cautious, but don’t bet against a trend this strong until it gives you ample evidence to do so.
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)
The information set forth herein was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy. Neither the information, nor any opinion expressed, constitutes a solicitation by us of the purchase or sale of any securities or commodities. There is no guarantee that the views expressed in this communication will become reality. Investing in the stock or bond markets involves risk and potential loss of principal. Investment strategies should be thoroughly vetted and discussed with a financial advisor prior to implementing.
