June 28, 2014 Strength In Numbers
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For more background on this report, the Strength In Numbers ppoint further explains what I am building here. Previous reports can be read here.
The battles aren’t just raging in countries overseas, as always the markets have their share of them as well; but as often happens, one side just seems to constantly overpower the other every time they pop their heads up. In the markets, the Superpower in recent memory is definitely the bulls. They have been able to stamp out every uprising the bears attempt to mount, and this has been going on for a couple of years now. It will certainly end, and maybe soon; but it is best if we wait until the evidence suggests the end is near. And, by evidence, I don’t mean increased top calling. I prefer to look at Relative Strength and Breadth as evidence so let’s dig in…
Macro Relative Strength
The market structure continues to be acceptable. Commodities are riding high, but equities are not suffering from it at these levels. They would need to move to much higher extremes for them to produce a drag on equities that could be lasting. The $DIA was an equity laggard this week which is fine especially with $QQQ leading and $IWM next, the latter putting in a 4% month so far with one day left. The short term sideways action makes sense after the hard run off the lows, but if the other two can follow the $QQQ lead and make new highs, it forces more hands. The Equity Size & Style continues to gradually improve with Growth and Small Caps moving back up the ranks. All in all, this still points to strength right now. It will end when it does, but nothing here suggests it’s imminent yet. Large Growth led this week, but Small Caps held in as well. With the short holiday week it could be whippy on lower volume and often moves can get exaggerated. That said, the way we closed this week, I expect some attempt to push higher, but only time will tell if there is enough interest this week to break out the $IWM which is the next important milestone I am looking for.
Universe 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 New High-New Low Differential fell off some to begin this week, but recovered toward the end which is typical for sideways markets. We still need to take out the trend line in earnest for me to be happy.
The Advance Decline Line looks as good as you could want. Last week, the AdvDec Line back tested and this week price did.
The McClellan Indicators is waffling a little with the Oscillator making lower highs and moving briefly below zero, but again don’t forget this is as price moves sideways to higher. Longer term, the Summation index flattened, but refused to rollover as well. With price closing near the highs of the week, it only makes sense to give the bulls the benefit of the doubt until it at least rolls over.
The Moving Average Breadth not showing much action with these markets. The %>20sma are diverging some which should be watched, but not falling off and won’t until the bears can get control for more than a day. The real goal here is to still get the %>200sma back above 70% for comfort.
Breadth Thrust Indicator blah blah blah, next… No, I really do like this indicator at short term lows, but this middling action isn’t actionable at all.
Percent Days still quiet as can be. Sure, that can be the calm before the storm, but in my experience, it leans bullish. When reversal days like Tuesday don’t even register with any extremes on either side, the bulls are in full control. Calmly, quietly marching forward.
Summary: The Universe closed near the highs and the breadth picture looks very solid on all long term views. The short term measures are a little waffly, but not bearish at this point. There is no sign yet of a top from a breadth view. Until this changes, we can march on.
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. 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 not a whole lot new here to report. Onward and upward!
Broad Sector Moving Average Breadth still looks pretty solid overall. The short term view had more give back in many sectors, but with price moving more sideways, it suggests the rising 20smas were catching up with price as opposed to big drops in price. Time will tell, but as long as the other two remain solid, pullbacks in the %>20sma are often a buy signal.
Broad Sector McClellan Charts might be worth a closer look (usually are). This week we have some of the Summations cresting a bit and threatening to roll over. This should be watched, but the Oscillators dancing around the flatline don’t feel too ominous. Until this resolves, I will be paying a little extra attention here.
Broad Sector Breadth Thrust still nothing.
The New High – New Low Differential had a fairly benign week after last week’s expansion. The only notable was Utilities which just kept chugging along.
The Sector Breadth continues to act well in the face of some sideways action. Tuesday’s reversal didn’t really show up but in a few places. However, one thing the sideways action did provide is some separation in how different sectors are acting. The %>20sma readings probably along with the McClellan Oscillators have been correcting for over a week. Maybe working off some excess or could be showing internal weakness. With the trend solidly up, I would go with the former until this data changes.
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: 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.
Sector Highlight
I mentioned above we could be about ready for another rotation if the markets want to continue higher. One sector that has been resting most of this year is Consumer Discretionary. This is a broad and diverse sector with areas like Autos that never really had a problem on one end, and Household Durables on the other end that encompass the Homebuilders and related companies. Of course, it also has Retail stuck right in the middle, so there are many influences in this sector giving it the most Subsectors of any I follow with 8.
The Advance Decline Line is currently tapping on the highs of the year as price approaches its highs. Basically, the AdvDec Line has been in a 6 month ascending strangle and is at the top. If we can get a firm break, then price will likely not be far behind. The nice thing is this sector is no where near extended so a breakout could have some legs.
Percent Days have been very uneventful just like the broad market.
The Breadth Thrust Indicator has just been plodding along since the April lows.
The McClellan Indicators are holding well. The Summation avoided a cross this week and jumped to end the week. While this was happening, the Oscillator could care less. All it did was stick close to the flatline. I tend to believe the Summation over the Oscillator here with the price setup we see.
The Moving Average Breadth have moved out of the spring funk nicely with improvement in the all three measures. All are pointing higher, but none are frothy even with price knocking on the highs.
The New High – New Low Differential is positive and has improved in recent weeks, but can’t even begin to get interested until it breaks the downtrend in the Differential and New Highs. New lows are disappearing which is good, but until New highs really begin expanding, the sector will just churn.
The Subsectors view below shows Autos are really the stalwart with Hotels, Restaurants & Leisure the next strongest on this view. The rest excluding Retail, look like they have been improving in recent weeks with many challenging the highs. Media & Entertainment has my attention as it looks like the AdvDec Line is ready to go here.
The Moving Average Breadth Dashboard also shows some dispersion in how these sectors are acting.
Below are the Subsector breadth charts for review:
I have also added a page with all the Broad Sector Consumer Discretionary Breadth Charts to view them in the same layout as the subsectors above.
Here are the Consumer Discretionary RS Rankings:
Subsector RS Rankings
ETF RS Rankings
As mentioned at the start, Autos are and have been king of this sector for a while, but it is Media & Entertainment on the move this week. I would also keep an eye on Household Durables as it seems Housing might be ready to reemerge as well. Retail is still up in the air in my opinion.
Top 40 Consumer Discretionary RS Rankings
Bottom 40 Consumer Discretionary RS Rankings
If you want to dig deeper into the individual Consumer Discretionary 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: The week turned out well in my opinion, especially after the Key reversal day on Tuesday that turned out to be less key in the end. With most of the major indexes as well as the Universe closing near the highs and strong long term breadth, I think the current superpower should be given the benefit of the doubt. I am making light of the situation some, but things really do look pretty solid and I feel like l get a barrage of reasons we are topping or worse about to crash on a daily basis. From a sentiment stand point, I couldn’t ask for more with the breadth and relative strength backdrop we are seeing. However, I fully understand this will not last forever. I also understand it is my job to bring that information to light when it materializes. It is not present today, so keep doing what’s working until it stops. Just make sure you actually do something when those changes actually appear.
Have a great week!
G. Thomas Lackey Jr, CMT CFP®
Follow me on StockTwits and Twitter @gtlackey (All market data above are derived from Stockcharts.com, Esignal, and Reuters Datalink)
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