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Macro Relative Strength
The markets took a very orderly pause this week giving back only a slight bit of the recent gains. The action over the last month in equities has been strong to say the least and led by $QQQ & $IWM, so a slight rest or even pullback here should be fine. The Intermarket Structure has improved greatly. Many don’t like the $USO being on top, but in my experience it has been a net positive for equities until it gets to an extreme and I don’t think we are there yet. The Size & Style structure remains mixed with Small Caps of all types still on the bottom. Part of this is due to the make up of my RS calculation, but we are definitely still seeing most of the action in Larger names. However, it was encouraging to see $IWO & $IWM come in as the top performers for the week. Value continues to remain strong, but Growth areas have been making some headway. It is a good sign that Small Caps showed positive relative performance this week during the slight pullback. So far, this looks like good digestion. With the RS Structures improving, I believe it will resolve higher in the coming weeks. Oil is not likely to become a real problem until it gets a good bit higher.
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 came off a bit this week, but no damage. Friday it perked back up a little on a pretty flat day, so the highs are likely to begin expanding again quickly on any move higher. At this point, a major top in the near term looks off the table for now.
The Advance Decline Line is now backtesting the highs after forging ahead of price. Unfortunately, the Universe never made new highs, but is right there. Still looks very constructive to me, but until price clears, it should be monitored closely.
The McClellan Indicators held up well during this week’s noise. The Oscillator came right back to the flatline before turning back up on Friday. The Summation index took it all in stride. A little flattening to end the week, but remains well above the signal line and zero at this point, so let’s lose one (or preferably both) of those before we begin to worry.
The Moving Average Breadth all crooked over this week at or near the high lines. This is not too much of a worry yet, just ebb and flow. If we do rollover harder here without the Universe making new highs, it would be a short term concern, but let’s see what this week brings before getting ahead of ourselves.
Breadth Thrust Indicator forged another thrusting higher high this week before coming off fast. This just adds to my thoughts of a minor pause instead of a top. If we were topping, I would expect some diverging here.
Percent Days no new action again this week. It has been very quiet on this for a while and that is a good thing.
Summary: As we saw some softening this week in price, it also showed up in the breadth indicators we track. Not much, but some. It looks like very healthy digestion right now and no reason to get riled up until that changes. I would be a lot more comfortable with where we are if we could forge a new price high to go with the strengthening breadth, but that should happen in due time. If it doesn’t, then we have a reason to worry.
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 shows most sectors meandering around the highs except Basic Materials which had a strong week this week. Energy also remained solid and doesn’t look ready to slow down at this point. Overall, the participation remains broad.
Broad Sector Moving Average Breadth is still showing broad participation as well and looks healthy. The sectors that pullback the most this week seemed to be in defensive areas. None look terrible, but during a pullback week, it is worth noting which sectors did and did not give ground in the short term readings.
Broad Sector McClellan Charts are still fine with the Oscillators oscillating and the Summation Indexes still look strong. A few are flattening, but again it looks to be in more defensive sectors to me. One to make note of this week is the cross we saw in Basic Materials. I like the space and it may be waking up here.
Broad Sector Breadth Thrust No extremes equal no signals.
The New High – New Low Differential is starting to become more important. If we are going into another leg higher, we should be watching closely here to see where we get the most expansion of the NHNL. Not just spikes, we want to see steady progression from week to week as we proceed.
Sector breadth held up well again against this week’s pullback and is not putting out any big worry signs. We could pullback for a while longer and even go deeper, but the action in sectors does not suggest it will be a major event. We will see more deterioration before that comes. You really couldn’t have asked for much better after the recent run higher off the lows we have experienced.
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 tradable 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.
Summary: From this view, we see the weekly losses were a little deeper in many areas than the breadth suggested. It doesn’t really change the picture, instead shows how the weightings of certain components can make such a difference. It still looks fairly orderly, so I would concentrate on those areas making steady relative strength gains in recent weeks. Lucky for us, these tables make that easy to discern.
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.
I asked on Friday which sector I should highlight this week. I got a varied group of suggestions. Energy actually lead the votes and definitely still has a lot of good set ups, but ultimately I decided to go with Marty’s suggestion and looked at Industrials. I know, I changed the rules; but I noticed we have only covered Industrials once this year and it is probably time to look again with the recent action. It is a fairly large sector with 6 subsectors to make it up. The largest being a kind of catch all for the business services which is why it is so much larger than the others.
The Advance Decline Line popped above the 4 month range and is now backtesting. Price also made a slight new high, but couldn’t hold it into the end of the week. Both are still right at the highs, so not a big worry here. This could be the retest, we should know this week.
Percent Days can be worth watching closer in larger sectors, but I don’t see anything big at the moment. The 80% down day this week on the rejection of new highs might deserve a mention, but not action.
The Breadth Thrust Indicator saw a strong thrust and just as strong a fade, even though price hasn’t come off much. I consider this a slight positive and am looking for the next pivot higher for action. It doesn’t have to be an extreme, and actually would be a better confirmation of the thrust if it wasn’t.
The McClellan Indicators looks great here. The Oscillator is at the highest readings since September while the Summation Index has made a solid move higher from below zero. As long as the Summation Index holds up, I would use pivots higher in the Oscillator as opportunities as mentioned with the Breadth Thrust Indicator above. Where as high spikes might come near the end of a short term move, usually they do not show up at the end of intermediate moves. This action put in context with the positioning of price just below the highs is why I see it as an opportunity going forward.
The Moving Average Breadth has moved back into a solid position after meandering most of the spring. Not extreme and no divergences give it room to continue if it wants.
The New High – New Low Differential is another sign of the underlying strength in the sector. It never really turned negative during the 4 month sabbatical, and is perking up quickly now that we are challenging the highs. Watch for continued expansion and if you see it, go with it.
The Subsectors view below shows most of them continuing a steady move from lower right to upper left which is what you want to see; however, they all seemed to take a break over the last 4 months. That changed once we entered June when they began to pop out of the consolidations. The only one not making new highs is Construction Materials which has been more volatile anyway.
Below are the Subsector breadth charts for review:
I have also added a page with all the Broad Sector Industrials Breadth Charts to view them in the same layout as the subsectors above.
Here are the Industrials RS Rankings:
Industrials ETFs took a hit this week with Transportation being the biggest drag after a long run higher. It will not be a big deal if the rest of the subsectors pick up any of the slack. I also wouldn’t count out the transports just yet as they were due for a pause. One note is Water ETFs were the positive influences here. This is one of those subsectors that is hard to place. I put the emphasis on water in Utilities, but most of the companies in the field are actually equipment makers which is why the ETFs fall under Industrials. That said, the charts look decent in both places, so may be worth a look. (h/t Mike @SSTtrader who regularly spots things in my reports I might even miss)
If you want to dig deeper into the individual Industrials 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 was a week of rest more than anything. No new gripping evidence this week and the pullback has been orderly. Plus, there are still many nice set ups showing themselves, so I would be looking to take advantage of them if we can continue Friday’s reversal attempt.
Have a great week!
G. Thomas Lackey Jr, CMT CFP®
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