June 7, 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.
Macro Relative Strength
The markets continue to build on the recent moment. This week was finally led by $IWM as it broke higher from the small base and recent downtrend helping it move up 40 points on the Intermarket RS list. Interestingly, it remained stagnant on the Equity Size and Style list which we will talk about in a minute. All in all, Equities were far and away the top performers again this week. Those making new highs also extended quashing much of the false breakout talks. The Intermarket RS structure is pretty much back on track now, but the Size & Style rankings are holding more conservative for now outside of $QQQ which has been very strong. Continued strength will likely change the structure back to signalling strength mode sooner than later. Even sideways action would still improve the structure here as the steep price drops begin to fall out of the calculation. Very good to see $IWM take the lead for the week as it has catching up to do, but all equities are performing well at the moment. Intermarket structure is moving back positive after a 3 month break and now we should expect size and style to shift more positive soon. If it doesn’t, it would be worth noting.
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 finally showed a decent expansion this week. It is interesting as so many are focused on the cap weighted indexes making highs, they are missing the chance this is an initiation. It may be initiation of the final leg for now, but initiation just the same. Two solid days above the down trend line to end the week is great, but it needs to continue from here. The Moving averages are both pointed up now and the 10sma is running higher and also above that down trend line.
The Advance Decline Line made new highs this week ahead of price which is encouraging and confirming the increased participation even as the major indexes make new highs. The 3 month slow down mentioned earlier might be most evident in this chart or the McClellan chart, but that looks to be ending.
The McClellan Indicators had my eye last week as if they were hinting. This week, both showed nice action with the Oscillator holding above zero before thrusting back to the highs. All the time, the summation index worked its way back above zero confirming last week’s signal line cross. This puts the intermediate picture back positive unless it fails to hold zero quickly.
The Moving Average Breadth had a stark improvement with other the strength. Some are worried about the %>20sma getting hot. I don’t see it, looks like they are just nearing a sweet spot as the lower two move into the upper zone and the %>200sma plays catch up. The warning signal comes when they cross back down out of that upper zone (or better yet show a divergence and cross down out), not when they enter it.
Breadth Thrust Indicator came back and made higher highs this week which shows there is some thrust coming back to these markets. It is not really a signal, more confirmation and starts over any thoughts of divergence which are very common here.
Percent Days no new action this week.
Summary: Pretty much every breadth indicator here is improving and leading the price toward new highs. Sure, you can argue McClellan Oscillator is hot or breadth thrust is high, but those are very short term indicators. The intermediate to long term ones are either making new highs or firming up very well. Follow it until it gives us a reason not to. It actually looks to me like there is a chance (not certainty) we could go into a fast run here. This week’s improvements should scare those who are under-invested. Let’s see how they handle that fear if we continue to grind higher.
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 has all of the sectors back near the highs except Basic Materials. This shows the broad participation still in the markets overall and broad participation usually leads to higher prices.
Broad Sector Moving Average Breadth last week things were looking better, this week it shows short and intermediate readings are running now. The long term is where we still see differentiation. Of course, all of this is with the exception of Basic Materials which we will discuss this week in the Sector highlight section. Overall, the improvement is easy to see here.
Broad Sector McClellan Charts hinted last week and are moving well at this point. The improvement in Financials, Health Care, Industrials and Technology are important since they make up a very large percentage of the markets.
Broad Sector Breadth Thrust are starting to show some energy, but not really a signal for action.
The New High – New Low Differential first time in a while we are seeing some expansions higher. This could be initiation type moves, but it is too early to say. If they continue to expand, don’t argue or fight it!
Even with Small Caps lagging recently, the participation held up pretty well through it and this week showed to gusto. In many fashions, it resembles more of an initiation move, but at this point in a mature rally, it is hard to tell what it can initiate. We have been on a multi-month sideways move, so it may be time for another run higher even if it is summer. I still like catch up sectors, but those are becoming harder to find. Oh yeah, and with Financials getting in the game and making new highs, that story is off the table for now too. Bias is higher until something 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: Another week of gains in almost all readings. It definitely feels like many were caught off guard. How much they have to adjust to get right we just don’t know yet, but that feels like what we are seeing. The sectors that were beat up are coming back strong and cyclicals are taking in a good bit of flow, but haven’t taken back over the top ranks yet. This shows the defensives are holding their own. It makes it hard to get a larger picture read, but not hard to find places to make money.
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.
Looking at all the sector work above, it seems one sector is getting left behind in all this and that is Basic Materials. It kind of stinks, because it was one of my top sector picks coming into the year. It is one of the smaller sectors in both number of components and market capitalization, so if there is one sector that really doesn’t need to participate, it is this one. Basic Materials has not taken part in the recent strength, but it also didn’t really take much of a hit during the pullback. It just sort of rested in the middle, but I believe if the overall market strength continues, it could lift this sector as well.
The Advance Decline Line has been falling for the last two months, but price hasn’t really followed suit and is now about ready to challenge the highs. It seems the leadership here has been narrow (mainly Chemicals), but may be trying to improve.
Percent Days small sector, large swings. Don’t read too much into it, however interesting how mild it has been lately.
The Breadth Thrust Indicator no extremes since late January also suggesting very little action in either direction.
The McClellan Indicators gave a couple of signals to end the week with the Oscillator surging through zero for the first time in a while. The Summation Index also crossed the signal line Friday. It is day 1, so a failure is still a decent probability, but it looks promising combined with the price action coming out of the 3 month coil.
The Moving Average Breadth has also been stuck in the muck for while now. If they can start moving higher out of the range, it has plenty of room to move. Continued improvement would also likely garner some attention since it is the least overbought and that seems to be on everyone’s mind already.
The New High – New Low Differential is also worth noting. This many new highs with it just coming out of basing action is promising, especially with the negative readings in recent weeks on the NHNL.
The Subsectors view below shows just how much Chemicals have been pulling the weight here as they continue to sport a beautiful Advance Decline Line. There is no evidence of Chemicals letting up yet either. However, if the other two can forge breadth bottoms here and catch the high tide, it could usher in solid improvement in the broad sector.
It is hard to fully trust the sector until you see more improvement in metals of all types. Chemicals can only carry the whole load for so long. Below are the Subsector breadth charts for review:
I have also added a page with all the Broad Sector Basic Materials Breadth Charts to view them in the same layout as the subsectors above.
Here are the Basic Materials RS Rankings:
Broad Basic Materials ETFs are leading mainly due to the capitalization and Chemical weightings which lends to using such names to play the sector for positions. The metals components are always volatile and probably more favor traders.
Top 20 Basic Materials RS Rankings
Bottom 20 Basic Materials RS Rankings
If you want to dig deeper into the individual Financials 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: New Highs in most major indexes and a break out in $IWM show the underlying improvement we have been talking about for weeks now. This action should get the attention of everyone, especially those who lightened up too much in the spring or worse, those who keep waiting to buy the dip and never trust it until we make new highs which they don’t want to buy either. A vicious cycle to get caught in, but I suspect some still are. These markets never broke down on the weekly charts, so why expect major weakness? Now we are motoring forward and don’t have much if any evidence of weakness in the forefront. Yes, we had many warning flags, but those are to get your attention, not send you into the bunker until someone yells all clear. Knowing your time frame helps maneuver tough spots like we just emerged from, but overall knowing the real market structure and strength under the hood is best for good decision making.
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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