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Macro Relative Strength
After no commentary last week, I am back and it doesn’t really look like things changed all that much. Sure, we are still seeing intraday and intraweek volatility, but don’t seem to be getting very far on most of the major indexes. I mentioned a couple of weeks ago that it looks like large caps might be resting while small caps played catch up. Since then we have seen just that, $IWM is back up at the highs with $SPY $QQQ and $DIA. All in all, equities are holding in pretty well. All Equities are in the top half of the intermarket list with $TLT and $UUP at the bottom. Top half is our preferable placement in this list, and moving to the Equity Size & Style list, we see a Small to Large bias with Growth still edging out value in all the categories. It is also worth noting most of this list was green on the week. The structure of both lists looks fine right now, especially with the markets remaining in a range. Actually, the Size & Style has improved some which keeps us leaning towards a breakout. However, we cannot forget it is summer time and that can slow down even the best of intentions.
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 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 (or here), it will take you to a page that will go much deeper into the Sector ETF Relative Strength.
It was all about where you were fishing again this week. The lists above are littered with green, yellow and red without much of a pattern. Very few sectors or subsectors moved more than 1% on the week in either direction. Financials remained a standout being the only broad sector gaining more than 1%. Regional Banks, Investment Services and Insurance all look great inside Financials. The leading areas look to be Financials, Technology, Consumer Discretionary with Energy resurging again. This is pretty solid leadership even if Health Care does finally take a back seat for a bit. We are not there yet, but I am starting to see the RS in the Health Care space weaken and will be watching to see if the charts follow. Relative strength may be our warning system, but the chart still rules the decision making. Sectors are still rotating well with recent leadership in Financials, Technology, Consumer Discretionary and now emerging again in Energy, while Health Care is starting to look a little tired.
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 breadth picture flipped back to softening a bit this week with the markets giving up a little ground. Not unusual, but does pull us back to a more neutral wait and see mode.
1. NHNL Differential remained strong this week hitting its highest level since March.
2. McClellan Summation Index is trying to level off and turn below zero which is usually a solid signal (failed in May).
2. Price weighted index is coiling near the highs.
1. Moving Average Breadth readings are muddling.
2. Advance Decline Line briefly broke the longer term TL and snapped back quickly. Needs to move higher to negate the break.
Lots of people are noting the divergence in the 200sma (hint..it looks a lot worse depending on chart scaling), but here we can see it hasn’t exactly been dramatic. This is why you don’t see me putting too much of a spotlight on any one of these measures. Okay, once in a while I will lean on the McClellan Summation Index more than the others, but it usually deserves the attention. They are all important in their own way, but analyzed together gives a much bigger picture of where we really are. Right now, things are going nowhere fast, but still look pretty good even with the 2 months of coiling we have seen in the price weighted index I use with these charts. This keeps me favoring an eventual break higher unless we start seeing more pronounced weakness in these breadth readings.
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.
Sector breadth is still holding pretty well unless you are interest rate sensitive. We have talked for many weeks about how these sectors are being dragged down by the talk of raising rates, and that narrative is likely to lose its appeal for a bit after this week’s FED meeting. Who knows what they will do, but I am still in the “Lower Longer” camp and am looking at sectors like Real Estate and Utilities and subsectors like Energy Pipelines that are sufficiently oversold on price and breadth. If we don’t get a hike (which I doubt we will), I think these could get some play even if short term.
Those are the weak sectors, but looking at the ones I mentioned above like Financials, Technology, Consumer Discretionary and even still Health Care, the breadth here still looks fine overall, but can still improve. If we do begin to move higher out of the coil, I will be keeping a close eye on the turns in the Sector McClellan Summation Indexes this week to help decipher which sectors are getting the rotation and which are taking a back seat.
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 are once again stuck in the middle. The RS readings still support looking for opportunities in the markets, but with the $SPY not making any headway many are getting worn out. I am also hearing a bunch chatter about the weakening breadth, but when I look at my breadth readings, I am just not seeing the major concern. So far this year, breadth has not been particularly strong, but the weakness is mild and kind of makes sense with the back and forth we have experienced. I would consider this an Aftershock (from October) until I see more weakness in both the breadth and relative strength areas. It has been much more segmented so far this year, but that is nothing new as we have talked about that the entire way. This is a market of fishing lanes. It has been important to be in the right sectors this year and follow the rotation. If you are nimble enough doing this, you are fine. You can certainly drop down and pick individual names in these sectors, but with the current volatility, you need to be really good to beat the sector flow in this type of market. For most, the payoff might not be worth the extra effort and anxiety if you look closely.
Have a great week!
G. Thomas Lackey Jr, CMT CFP® CFS
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