July 26, 2014 Strength In Numbers
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For more background on this report, the Strength In Numbers ppoint further explains what I am building here. Previous reports can be read here.
Macro Relative Strength
Click on either table for a deeper view including the Top and Bottom 20 ranked Broad Equity ETF and FINVIZ links.
Equities, for the most part, are still hanging in the top half of the Intermarket rankings which is what we want to see, but to see how bad the $IWM is performing certainly takes some shine off the others. I hear many continue to talk about this being the canary in the coal mine, which it could be, but it doesn’t have to turn out that way and, even if it does, the lead time can be very long in some cases as the breadth narrows at the top. Another caution to be aware of is the rise we are seeing in $TLT and $UUP which both can cause indigestion in equities if the strength persists. It is worth keeping an eye on, but we have seen this movie before, so wait until equities show their hand before reacting too strongly. Right now, we are looking at the RS structure which is not optimal, but holding up okay so far. The Equity size and style also shows the extent to which $IWM has been underperforming, but growth continues to shine in many ways. This makes for some mixed messages that has added to the confusion. I am not going to sit here and say I know how things will turn out; however so far it does not look like the traditional set up for a major top. As we will see in the breadth section, things just aren’t deteriorating enough in the right places for me to suspect that. Small Caps continue to wave the caution flags and the rise in $TLT and $UUP are adding to them, but so far the Large Caps and Growth names don’t seem to be paying much attention. Neither the bulls or bears are charging ahead right now, so take things slow and look for more tactical opportunities until things clear up a bit. It could just be summer and lack of attention that has put us where we are.
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 remained positive all week, even though Friday was a close call. The early strength was also able to turn the 10sma back higher for now. No big flags here at the moment, but the bulls need to move above the down trendline on new highs before the all clear can be sounded.
The Advance Decline Line snapped back as well early week, but is really just hanging out at the previous break out level. Long term trend is still up and in the short term there is no clear direction.
The McClellan Indicators is still on caution as it continues to come in. Friday it even cracked the flatline. I mentioned this before, but zero is not a magical line in the sand. We need to see how it acts here near this level, but right now it doesn’t look great. On the positive side, now that it has fallen below zero, a pivot higher from here increases the probability of a trade-able move higher (green arrows).
The Moving Average Breadth is still working off the bottoming signal from last week, but needs more thrust if it is going to work. So far, we haven’t seen it.
Breadth Thrust Indicator is a good example of a signal last week that needs more thrust. It was actually doing fine until the end of the week reversal. At this point, it could easily go either way as it is a noisy indicator in the middle.
Percent Days absolutely nothing, nada, zilch since the 90% days last week which are still valid. Almost like no one really showed up to trade this week at all.
Summary: It was a fairly flat week that had its ups and downs, but really does feel like very few participants showed up this week. Most of the breadth measures were lethargic to slightly improved except the McClellan Summation which continues to point to more correction in time or price or both. If no one shows up again this week, it will favor the bears as they might have a little short term adrenaline still flowing. That said, it won’t take much to whip them back in line if the earnings continue to impress and geopolitical noise subsides at all. We have held up well so far. The thing is, both sides could be expending a good bit of energy here, so as usual it all comes down to which side wants it more. I may slow things down a bit, but I definitely remain loyal to the current trend until it proves me wrong.
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 has been showing for a few weeks now we are seeing some correcting under the surface. Very few new highs in the AdvDec Lines have been forged this month with the exception of Real Estate which we will look closer at below. That said, nothing is really falling out of bed here. Basic Materials, Health Care and Technology might have the steepest drops, but all of those snapped back well last week.
Broad Sector Moving Average Breadth are all still working off the pivot lows we saw last week. Many stalled last couple of days, but all still valid so far. One that didn’t seem to stall was Basic Materials which I think is worth keeping an eye on as it could be a significant tell.
Broad Sector McClellan Charts may not be extremely bullish at the moment, but can still provide a great amount of information to the watchful eye. Seems to stand out in the crowd here. I am also watching Utilities and Consumer Staples closely. Both of these sectors Summation Indexes just don’t look healthy to me even though they certainly aren’t the lowest among the sectors; and the feeble bounces the respective Oscillators saw last week were telling. This gives me pause to the idea of a larger correction here. I don’t remember these two sectors leading us down. Anything can happen in the markets, but defensive sectors are more likely to hold up during the early stages of a larger downturn.
Broad Sector Breadth Thrust still has many sectors working off last week’s extremes, but it is hard to find the thrust part of the equation. This must improve or we will see a deeper pullback that produces lower and more thrust-worthy extremes.
The New High – New Low Differential not even close to enough negative readings here in any sectors to be too worried.
The sector breadth picture above is almost one of boredom more than anything else. There is definitely some rotation continuing throughout the sectors, but still no evidence of much money leaving the markets. The McClellan Summation Index, which is very important, is showing the most cautious or corrective action so far. The biggest thing short term though is the lack of thrust off the recent extremes giving me the idea there is just nobody home at the moment. If you are worried, step aside for a bit, but I wouldn’t press shorts too much until we see more deterioration somewhere…anywhere.
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: The view above is showing there are definitely still strong segments in the markets, but you have to look past the major indexes and major sectors in many cases. The strength pockets are falling down to the subsector level at this point making it more difficult to invest more broadly right now. This view also points to being more specific or less involved until things start to re-align one way or the other.
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.
Real Estate continues to be a standout among the major sectors as it has marched higher most of the year. Now though we find ourselves at the pre-taper talk highs of last Spring where the big drop really began. It wouldn’t surprise me to see the sector pause here for a bit or even pullback a little as those who have been underwater for a year in a bull market decide to get out before the shoe drops again. Will they be rewarded for such a move? No one really knows, but let’s look at the data and see if it gives any potential clues. The sector is one of the smaller with 155 components broken down into 4 Subsectors:
The Advance Decline Line is the first clue we have that the Real Estate sector may have a little more strength under the hood than many realize. The AdvDec Line broke out back in March and hasn’t looked back. The recent breakout is currently backtesting and could fail short term, but this longer term breadth strength doesn’t look to be waning here as price nears the previous highs.
Percent Days is not useful here on a sector with 155 components. Swings can be often and concentrated. Right now though even this seems pretty benign.
The Breadth Thrust Indicator is also very little, if any, help at the moment. No extremes present for a while. Looks like those invested here are comfortable at the moment even if they have to sit through some fluctuations. The large dividends help in that respect.
The McClellan Indicators is the only sector Summation Index that is currently moving higher and it just crossed the signal line back up last week. During all this, the Oscillator is just hanging out in the middle very comfortable with the current action.
The Moving Average Breadth could be the short term irritant. This shows all three turning down this week and losing ground with Friday being the brunt of it. This might have a little to do with Interest rate worries; but we have seen this before, so let’s wait a bit to see if there is any substance to those worries. If Interest rates do rise swiftly, it would cause more turbulence here. That said, I don’t see them going materially higher anytime soon, which if is true will keep this sector in favor.
The New High – New Low Differential is also continuing to hold up well and even grow a bit. Nothing near last month’s spike yet, but if we move out of this handle (of a large Cup and Handle pattern), the charts are set up to see a fast expansion here. May not produce as good of action as last year, but I definitely think it could push things well above those highs we saw.
Real Estate continues to be set up for a potential breakout to new highs. The interesting thing is it could do so in either strong or weak markets as it doesn’t have a huge correlation to the broad markets. To me, that makes it even more worth having on the radar. We do need to see how Friday’s rollover plays out for a bit, but I will be watching for a trade-able entry if it does have any juice to it. Below, you can see how each of the subsectors AdvDec Lines are faring as well so you can decide how specific to get.
It is hard to argue with any of these right now. If you have to pick a nit, the Commercials are stalling a bit at the old highs. I think pullbacks should be used for opportunities until you see some weakness in the breadth picture, which we don’t have as of now. Below, you can dig deeper into each Subsectors breadth charts.
I have also added a page with all the Broad Sector Real Estate Breadth Charts to view them in the same layout as the subsectors above.
Here are the Real Estate RS Rankings:
There are plenty of ETFs in the space to choose from if you want to go that route. You can choose broad or segmented depending on your trading style. For those who want to head down to individual names, here you go:
Top 20 Real Estate RS Rankings
Bottom 20 Real Estate RS Rankings
Real Estate Bottom 20 on FINVIZ
If you want to dig deeper into the individual Real Estate 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: Life gives you enough things to worry about, try not to create more in your head. In the midst of the working with the markets and all the day to day noise, we are prone to making up things to worry about, hence all the top calling on every black candlestick we see. The breadth we just reviewed showed there has been some internal correction most of the month (which shows up in the $IWM), but overall the broader markets are holding up well. If you are an index investor or overly worried about the backdrop, take a few days or weeks off and the markets will be here when you get back. We are in the throws of summer and could continue to see the sideways or even down action, but so far whenever the bears seem to have their foot in the door, it gets slammed on them again. Even if we do see more summer doldrums, the longer term breadth picture has a good ways to go before the worries of a major top deserve more credence. For now, continue to do your homework and look for opportunities and make a plan. Honoring your plan is the best way to keep from getting hurt whenever the tide does finally turn.
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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