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This week’s report is a little shorter. The most important reason is the markets performed fine this week and didn’t offer a lot of new and exciting information, so I am not going to make a bunch of stuff up just to write more. When there is something worth noting, I will do so.
Macro Relative Strength
Equities continued to progress this week even with the commodity rush we saw. As I have said before, I am fine with commodities moving toward the top because there are sectors we can concentrate on when they are leading. The problem comes when people run to commodities like precious metals out of a greater fear. $USO, $GLD & $SLV I am sure are seeing some of that with the tensions overseas in both Ukraine and now Iraq. This is worth noting, but if it is not hurting the equity markets, so it doesn’t worry me much. Getting back to equities, it was nice to see the $IWM break out and hold those gains to end north of a 2% gain for the week. Next step for Small Caps is to test the old highs which is where it gets interesting short term. With the other major indexes already at new highs, we need the confirmation from $IWM. As I mentioned weeks back, we could see the $IWM go up and NOT be able to forge the breakout which could be what sets off a more relevant summer correction. This is pure speculation though. The recent strength in equities here is notable and should not be taken for granted. Below we will also see the breadth is supporting this move, which is just another reason we should as well. Small Caps led equities to another solid performance this week. Many are worried about the commodity strength. I am fine with it until it starts affecting broad equities or overall sentiment which it is not doing yet.
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 expanded throughout the week even with the benign days in the market. The strength forced me to adjust my trend line to the spike in March which puts it right above where we ended the week. This expansion is good as the Universe custom index breaks out this week.
The Advance Decline Line passed the back test of the recent highs last week and forged another new high this week with price slightly cracking that old high.
The McClellan Indicators continue to act very well as the markets have been trying to negotiate the highs. Last week I said not to worry because the Summation index was handling things in stride. This week it kept that stride as it continued higher all week. The Oscillator remained above zero, but didn’t give any big thrusts to put it back near overbought leaving more room to move if it wants it. Of course, we should watch for a divergence here which could usher in short term weakness, but again the Summation Index is not giving us much to worry about going into this week.
The Moving Average Breadth caught themselves early week and turned back higher to end back near the highs. The question now is, can we get the %>200sma back over its high line at 70%? If so, that would be the final long term component (along with NHNL and AdvDec Line) to move back into a strength position and would suggest some meat still on the bones.
Breadth Thrust Indicator nothing to see here, move along.
Percent Days no new action again this week. It has been very quiet on this for a while and that is a good thing. (no need to change at all)
Summary: We got our price high in the Universe this week (tweeted out mid week) and the breadth is confirming it on pretty much all measures. When we start to see some deterioration I will point it out, but for now the participation is broad and strong which is and should continue to be reflected in the markets.
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 very broad participation at this point with almost all making new highs. Those who aren’t are trying. Even Basic Materials which has been a notable laggard recently is not making a break for it and playing some catch up.
Broad Sector Moving Average Breadth ended the week very strong with some solid moves over the last two weeks as many major indexes have waffled.
Broad Sector McClellan Charts held up very well the last couple of weeks. This is one I strongly suggest you click through and review the sector charts with these indicators plotted. This is one of the best places to find sector differentiation right now.
Broad Sector Breadth Thrust nothing exciting yet.
The New High – New Low Differential saw nice expansion this week. If there is an issue it would be that Energy, Consumer Staples and Utilities made the largest gains and they are all defensive sectors. I believe it is a little to early to start that call. Instead, I am happy with any expansion and believe we will see other sectors joining the New High party sooner than later.
Sector breadth looked just as solid as the broad markets with pretty much all sectors participating at this point. There is still some cyclical sector lag, but each week that seems to diminish a little more. Energy has by far been the strongest and may be close to a short term peak, but the breadth there is so strong I wouldn’t be calling a top anytime soon unless something big changes. Basic Materials, on the other hand is playing catch up nicely as discussed couple of weeks ago. Rotation is the key to keeping the broad market moving higher and we are seeing it play out well for now.
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: The sector relative strength is still pointing a little more defensive as well with Energy and Utilities leading while Technology and Consumer Discretionary are at the bottom of most measures. One reason for this structure was the dramatic drop in these sectors earlier this year, but they are lagging just the same. Another thing to note is with the broad participation we are seeing. These are lagging relatively, but have still been putting in solid numbers over the last month. I would prefer the cyclicals start moving up the lists, but when 48 of 49 Subsectors are positive on the week, I am not going to argue.
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.
No sector highlight this week so I leave you with the Top and Bottom 50 relative strength names in my Universe.
Final Note: The markets continue to perform well as Small Caps make up ground. The overall structure of the markets are favorable right now and we shouldn’t argue with them. This week we are coming into the end of the quarter which is likely to see some repositioning and could send the markets either direction in the short term. So far, all I would worry about is the short term until we get at least an inkling of a reason to think it might be spreading to more. My top scenario is a test of the highs for $IWM comes sooner than later, but there is no telling how it will go on the first attempt. Be prepared for a choppy week, but don’t be too surprise if the bid remains solid on any reasonable dips.
Have a great week!
G. Thomas Lackey Jr, CMT CFP®
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