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Macro Relative Strength
The markets held well again this week and even made some headway. $IWM was again the standout breaking to new all time highs while the others were beginning to wake from their rest. $QQQ was the next best performer while $SPY and $DIA showed modest gains. This goes along with the message of the Size & Style list which is still solidly positioned small to large with a growth bend all the way down the pipe. Hard to argue with that. $USO remained at the top of the list even with a loss on the week as it continues to find its footing. There is still a lot of interesting stuff going on in the Intermarket picture as different asset classes try to find their way with all of the geopolitical drama, including of course the potential for FED rate hikes. Commodities are all over the list with $JJC at the bottom and $USO $GLD at the top. $TLT still hanging out near the lows as well, but did put in a positive week with no rate increase. The biggest question right in front of us is how the Greece situation will play out and how it will trickle through the Intermarket relationships, starting of course with its effect on the $UUP. I have no idea which way it will go, I just know when it does get resolved (even if only for a few months) there will be some waves. All in all, the equity markets are still solid and the Small Caps are leading higher with growth playing along well. We are in the summer, so things may take longer to materialize, but they look good for now.
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.
There was a good bit more positive this week for the sector world. Depending on which lists you are using, Energy was the only sector that was clearly red across them all. Not a huge surprise with $USO losing ground, but overall the relative weakness recently does surprise me a bit. However, the markets will always do what they want without regard to my opinion. They haven’t broken down completely, but for now I will move my focus a bit until they show some life or actually break down. There are so many other opportunities out there; we can’t afford to get bogged down.
Heath Care came roaring back suggesting it is not ready to slow down yet. Consumer Discretionary and Staples both had very solid weeks along with the recent laggards, Real Estate and Utilities. We have been talking for a month about those last two performing well once everyone realized the FED would not hike in June; I just didn’t think it would actually take until the meeting for everyone to figure it out. Now that the meeting is behind us, we should see these two sectors perform better until we start worrying about interest rates again in a month or two. The more participation, the better for the markets, so we will take it. We are starting to see some sectors making new highs ahead of the broader markets and the laggards are seeing some reversal action, all of which bodes well for the general outlook and suggests we continue to take sector opportunities as they present themselves.
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.
This week’s breadth slightly improved again after waffling last week. The positives are accumulating again with one big one showing up this week I will be concentrating on.
1. NHNL Differential remained strong.
2. McClellan Summation Index turned up and crossed (forgot to add the arrow) which is usually a big deal.
3. Moving Average breadth readings all closed the week above 50%.
4. Price weighted index made a new closing high on Thursday and did not give much back on Friday.
1. Advance Decline Line is not making new highs with price, but this is not as unusual as many think. It can play catch up if the breakout gets traction.
The positive breadth action is gradual, but continues to hold up well in light of the listlessness of the markets recently. The turn and cross of the McClellan Summation Index should not be taken lightly and bodes very well since it came off without price really following which suggests a lot of rotation under the hood. The breakout in $IWM, if it continues, should help further improve the breadth picture along the way. We had seen some breadth leaking throughout this year, but not enough to turn the tides to bearish; and if it does improve here, could provide some much needed momentum to the broader markets.
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.
Sectors still look good for the most part. We did see a strong bounce off the breadth lows from Real Estate and Utilities while the other stronger sectors continued to show solid participation. The problem children now (usually there are a couple) are Energy and Basic Materials which have been lagging. It will be interesting to see if that changes with any further $UUP weakness. So far the $UUP weakness hasn’t done much to help them.
Two ways to look for opportunities this week in the breadth charts above are to concentrate on the McClellan Summation Index to see who is turning and might be ready to start a new move and the Breadth Thrust Indicator to see which sectors (and subsectors) are showing the most thrust off the recent move higher. Thrusting action can show new moneys entering a space after a selloff of any duration. Both of these examples can be seen with Utilities and Real Estate over the last week or so and might be decent candidates to put on the radar.
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: I am happy with what I saw from the markets this week. Small Caps continued to resurge and even close at a new weekly high. Participation remained broad and we continue to see growth leading. These are all good things. The fact that we have been sideways most of the year is dragging on people’s psyche, but the data is still suggesting we stick with the trend and move forward. I know there are issues we can point to and that it is human nature to overemphasize these along the way. That is why having a solid foundation (with our data) to lean on when things are uncertain while being flexible enough to realize anything can happen (so be as ready as possible) is key to sticking with the trend and opportunities until they prove it is time for a change. We are not there yet, so focus, find your opportunities, develop a plan and work it with the confidence you need to succeed!
Have a great week!
G. Thomas Lackey Jr, CMT CFP® CFS
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