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I hope everyone had a great Independence Day to remember why we are here, get a little rest, and recharge for the week to come. I got a little of each of those, but apparently not enough of the rest and recharge, so I will be heading out of town at the end of this week with the family for a few days. That means no Strength In Numbers report next week or Scans after Wednesday. I am sure I will check in a couple of times, but will not have access to my Universe until I return next Monday. As I posted in one of my tweets, this week was short and sweet unless of course you were a bear.
Macro Relative Strength
Click on either table for a deeper view including the Top and Bottom 20 ranked Broad Equity ETF and FINVIZ links.
Commodities continue to run as $JJC got the gas this week. That is something we haven’t seen in a while. Commodities are having their day while Equities continue to climb. Commodities are worse for the market when they are climbing out of fear, and that is not really the case here. $DIA is the only major Equity index not in the top half of the picture and in my opinion the least important. The rest put in a solid week. $IWM even surged to new highs on Tuesday. It gave back some of those gains that day but still closed at a new high. The rest of the short week was spent holding on to that level. It is a good sign Tuesdays tail didn’t turn into a major reversal, but don’t let your guard down, it still could. Now, once we move down to the Equity Size and Style, some of those worries of a big reversal might dissipate. That line up is very nice to see with all the growth ETFs clustering up at the top now. It is worth noting $IWO has gained 8% over the last month. I faintly remember all the negativity on this one just a couple of months back. I hope all those who were certain of imminent doom changed their minds when the data changed, but I suspect many didn’t until the last couple of weeks. It has been a good run, but now Small Caps are challenging their highs which is where we get our next clue. If we don’t hold the gains over the next week or two (non-confirmation of the other indexes run to new highs), we could get a larger correction, but to anticipate that here and now is premature. Growth is back in charge for now which is the preferred structure. With Small Caps testing the highs, they need to keep moving to confirm the other Indexes. If they can, we keep going with short and sharp dips, but if they can’t, we could see a larger correction into the end of the summer. Small Caps hold the key, so pay attention.
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 bounced back this week as it should have with the strength we saw. Both moving averages are well above zero as well. All we need now is to take out this trend line and I will be happy.
The Advance Decline Line continues to run since it made new highs. This type of action bodes well for the markets and their potential to continue higher as well.
The McClellan Indicators resolved themselves to the upside after I discussed a little waffling last week. I like how the Summation Index refused to rollover and is now heading higher again. This is an Intermediate term breadth reading and so far it is not giving us any warning signs.
The Moving Average Breadth gave another sign of market strength here with the %>200sma moving back into the upper quadrant above the 70% level. Once this longer term measure gets up here, the participation is strong and the trend should be trusted until it moves back below the line. We are right on the line now, so it could be quick, or it could be like the beginning of 2013 when it remained above it for almost 4 months ushering in a persistent move with only one notable pullback. Either could happen. Our job is to try not to handicap either side and just let the data show us the way.
Breadth Thrust Indicator is not giving an actual signal here, but this high clustering is often consistent with one of those persistent lockout rallies we have seen a few times in the last couple of years.
Percent Days is still acting amazingly calm. Neither side is really sticking it to the other. The bulls are just marching higher and taking the attempted (and feeble by this measure) bear raids in stride. Until that changes, we will likely continue the grind.
Summary: I am definitely seeing some momentum indicators getting stretched on the upside all the way to the Weekly and Monthly readings. These indicators are what most people follow so when they get stretched, the top calls come out. I will watch those, but put more weight here in these breadth measures and, as we see above, there is nothing here that is calling an imminent top. The breadth picture is quite broad and strong, but also continues to expand. A pullback could come anytime, but also realize if the New High – New Low Differential can break out, you might want to strap in for a bit as a surge here would be a brutal blow for any bears left fighting.
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 continues to show most sectors are participating and hitting on all cylinders at the moment. We did see a knock in the Utilities sector this week which we will take a closer look at, but if one has to go, this defensive sector is the one I would vote for. On the other side, we saw Basic Materials, Industrials and Technology (among others) make new highs.
Broad Sector Moving Average Breadth are also doing well on all time frames here. You can see a little more detail in the Utilities hit on this chart, but the alignment still leaves open the possibility it is just profit taking after a run. Real Estate has also been weakening a bit on the short and intermediate measures. I don’t think it is a coincidence these are both defensive plays. However, just because they may be heading for underperformance, it doesn’t mean they will actually lose ground if the broad markets remain strong.
Broad Sector McClellan Charts most of last week’s caution resolved to the upside with the markets. We do however have another instance here where the Real Estate and Utilities look a little worse than the other sectors right now. It is worth noting that outside Energy, none of these look particularly extended right here giving them room to move higher if they want. Even Energy’s Summation Index could easily put in multiple divergences before the sector actually rolls over.
Broad Sector Breadth Thrust isn’t giving us any signals again this week, but Utilities and Real Estate are getting close for those who are inclined to buy the dips here. All the rest of the sectors are in the middle and not telling us much.
The New High – New Low Differential still looks fine. The expansion days in Utilities are one of the reasons I am not sure it will rollover hard here. Time will tell, but the new highs continue to hold up well. All sectors are in fact holding well. Now let’s get some good old fashioned expansion to make this summer one to remember…
I mentioned last week it looked like the breadth was holding up well to the sideways action and even improving in some areas. This suggested the opportunity for the markets to continue to grind higher was good and that is just what we got. The broad participation and structure we are seeing right now could usher in even more strength if the Summer malaise does not derail things for a bit. Even if that were to happen, I seriously doubt we would see a major top with these types of breadth readings. In the markets, anything can happen, but looking back I am not seeing any precedent for that off of strength like this. The weakness almost always shows up in the breadth measures before the broad market. I will let you know when I even see an inkling of that beginning to take root.
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: Outside the normal jostling for Sectors, nothing was really all that exciting. Energy continues to impress with Utilities right behind while Financials and Consumer Discretionary are near the bottom. Not what most expect to see near the highs. I am okay with that for now especially when I am seeing new setups in the laggard sectors. It has been a rotational market, so if we are to continue, this would be the next logical rotation. Of course, volatility is likely to increase if this begins to take place. As long as the money doesn’t leave, but instead just rotates, take advantage of the current broad market strength and join in.
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.
This week we take on the Utilities sector. This is the smallest sector I follow with 93 components. For that reason in the Relative Strength Page, I didn’t even bother to do the top and bottom lists, instead just posted them all for you to see. This also lends to very small subsectors with Water having only 7 names in it which can make the breadth readings more volatile than larger sectors. That said, we can still get some good info by slicing and dicing them to see what’s going on inside.
The Advance Decline Line has been on a great run since the beginning of February leading to a breakout in both breadth and price as the rest of the markets moved sideways. The Utilities outperformance had many market participants worried, but since the broad markets have regained their strength, the outperformance has waned and some profit taking makes sense. So far though, it hasn’t even broken the trend line on the indicator or price. Last week was the shot over the bow to get your attention, but no longer term break down has occurred yet.
Percent Days is not the best chart for this sector other than looking for clusters. The small size lends to more days registering taking away the effectiveness of the signal.
The Breadth Thrust Indicator went down in a straight line most of the week and is nearing the first line signal. We will see if it can make it there for the first time since February or if buyers step up before that happens.
The McClellan Indicators are showing a little fatigue here, but not outright exhaustion. The Summation Index has crooked over and is threatening to first divergence we have seen here in a while, but it has not crossed yet. The Oscillator took a fast dive this week like the Breadth Thrust, but not enough to hit extremes. It will likely take those extremes to get a cross in the Summation Index as a first warning.
The Moving Average Breadth showed us the best picture of the short term damage with the sharp drop in %>20sma readings last week. However, if you know this analysis, with the strong disposition of the other two readings, a pivot higher in the %>20sma from down here might be worth a shot. If it can get below 20% without much more damage to the other two, it would be an even better signal for a potential price pivot back higher. As always, it is in that bounce we will get our information of how healthy the sector really is.
The New High – New Low Differential is another reason it is hard to get too bearish on the sector. The expansion in new highs and the NHNL Differential this week suggest the longer term picture is improving, not deteriorating.
The Subsectors view below shows all have been performing well up to this point with Gas and Electrical leading. Water seems to be the laggard, but with it being 7 names, not really a big worry for me.
Below are the Subsector breadth charts for review:
I have also added a page with all the Broad Sector Utilities Breadth Charts to view them in the same layout as the subsectors above.
Here are the Utilities RS Rankings:
The Subsector level agrees with the breadth conclusion that Gas and Electric have been leading. Water surged over the last month, but has been volatile enough to keep it out of the top ranks. As mentioned above, with Utilities having only 93 names, I did not separate out the Top and Bottom RS ranked names instead you can see the total broad sector RS rankings and the subsector RS lists (as usual) here for those who want to dig deeper.
(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 was another good week for the markets. The breadth and relative strength both favor more strength which suggests to me any pullbacks will remain short and sharp until this changes. Until we see more than that, I think you stay with the trend and broad participation and look for opportunities. It remains hard to argue with what I am seeing, but the internals are not so stretched that it is worrisome. The coming week could change that, but don’t put too much weight into anticipation.
Have a great week!
G. Thomas Lackey Jr, CMT CFP®
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