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If you just want the highlights for now, check out the Executive Summary.
Macro Relative Strength
Intermarket Relative Strength is still not showing much clustering. Commodities remain the dominant factor, but I am not sure what to make of $DBA being on top. I can’t remember seeing that much before. Does it really mean inflation? Not sure, but it is worth watching. Other than that, Equities continue to be spread out, but are mostly in the upper half at this point. The Dollar $UUP and bonds are still on the low end of the strength spectrum. This is still fine for now. It would be nice to see equities continue to climb in the coming weeks to confirm the new highs. Note, they can still gain relative strength even if we happen to pause here. Actually, that would be even better. Intermarket structure is the same as last week overall with Commodities leading, but it is a good sign equities continue to climb back up in the rankings.
Equity Size & Style Rankings Growth continues to be king even with Friday’s Small Cap hit. The markets were much stronger under the surface this week than many believed and from this it looks like investors stayed with Growth. With $IWO $DIA at the bottom, investors are putting money to work opportunistically, not defensively. Russian Aggression can change this, especially short term; but as long as the fear stays an event and doesn’t become a mindset, I don’t see it being to damaging with this type of structure and the strong breadth we will look at next. Growth leading and Value lagging is the ideal structure and an added bonus with Small Caps leading again this week as they have now successfully caught up.
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 continues to remain solid. It hasn’t grown fast the last two weeks as we have been negotiating the highs, but hasn’t given any ground either. No warnings here right now.
The Advance Decline Line our clue last week was the Advance Decline Line making new highs before price and both continued to climb all week. This is not the structure of a major top. Price followed to new highs this week and neither price nor the indicator has looked back.
The McClellan Indicators holding a strong position. The Summation Index continues to take a steep trajectory higher while the Oscillator is clustering near its highs as well. This can go on for a while if it want. The Summation is on the verge of heading over the fall highs and has not wavered at all since turning higher. Both indicators are in strong positions at the moment. The Oscillator is clustering as price grinds. Summation Index points to more strength.
The Moving Average Breadth continues to perform as expected. The Short and the Long measures are rock solid and little by little the middle is firming. The 50sma reading is the one to watch, I expect it to grind back above the upper line over the next month; if it can’t make it there, then we can put up the first real caution. Not sitting in extremes on any level. Watching the 50sma reading the closest in coming weeks.
Breadth Thrust Indicator is also clustering near the highs as price grinds on. I don’t use this for a topping indicator, but what I will watch for is a 1-2 day drop that spikes this indicator after the cluster. That is often a good short term lower risk entry. Something to think about in case we get some fear to start the week. Clustering during a price grind is strength. Any spike down where the Indicator drops much faster than the price can be an opportunity even if it doesn’t make it to an extreme.
Percent Days as with many of our breadth indicators, the signals only come once in a while; but when they do, it is well worth knowing. It is just a bonus that they usually come when most are skeptical. And, of course, when they aren’t giving signals, they help us read the state of the markets better than most other indicators. No Signal, the message is the markets are relatively calm all things considered.
Summary: New highs this week after breadth pointed that way last week. The overall picture remains very strong and should be supportive of more expansion. If we do get some pullback, I believe watching the short term indicators (Breadth Thrust & McClellan Oscillator) for spikes down to buy is appropriate. Breadth this strong does not turn on a dime. One early tell will be if the percent above the 50sma rolls over sooner than later, but even that would just be the first breadth caution I see right now. Until we see breadth wane, pullbacks should remain buying opportunities; and don’t expect them to last for weeks yet, we got that one to start the year.
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. For this section, I have posted the Breadth Dashboards for the indicators I use. If you click on each respective title or the Dashboard for that indicator, it will take you to a page specifically for those sector breadth charts.
Broad Sector Advance Decline Line continues to maintain a strong and broad participation with all sectors at or near new highs. It is interesting to see Basic Materials, Energy and Utilities be the three with the least slope with commodities leading, but after the recent surge, it could be more pause than anything. No arguments with how this looks.
Broad Sector Moving Average Breadth at this point can be used more to monitor the trends and make sure the breadth is keeping up with price movement. I mentioned above that watching how the percent above the 50sma readings reacted would be important. The mini-breakout we saw in this reading for Financials is why I chose to look close there this week. Industrials had the same type of action, but we did that one last week. If these sectors can get in gear here as others that have been running recently like Real Estate and Consumers pause, then the rotation would continue and I believe the markets could march higher in the face of all the overbought noise out there.
Broad Sector McClellan Charts is showing all the sector Summation Indexes are running higher right now with none really extended at all. The Oscillators have even cooled off the last two weeks on many. No big warnings here.
Broad Sector Breadth Thrust we are still in waiting mode here, but starting to pay a little more attention. With many clustering near the highs, I would be looking for 1-2 day sharp weakness that brings these indicators down much faster than price. After thrusts like these, usually the first shot down is bought whether it makes it to an extreme or not.
The New High – New Low Differential continues to give us a clue of participation. It can be a little hard to get a good read because of the size difference in the sectors, but happy to see all remain on the positive side for now.
As we continue to monitor the breadth readings, we can see the participation is broad and strong at this juncture which is why I am kind of surprised how many are looking for a failure so hard right here. Why? Because we have gone too high? How do you know what too high is? I have no interest in speculating that. I just want to ride this terrific trend as long as it continues and exit once it has confirmed to me it is over. I believe it will show in these numbers first if things start to actually roll over. January is the closest we have been to a real rollover in quite a while, and the rebound off that low has been very strong and broad. That in itself should be a message you heed.
Sector Relative Strength Rankings
First, I look at the Custom Indexes and see what they are telling us on a price weighted basis.
Next, look at a Broad Sector ETF Proxy which I use Vanguard ETFs to make sure things are similar and for some tradable ideas.
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.
The sector world was mostly positive on the week with a few negatives scattered about. It is notable to see what sectors were positive in one list and negative in the other showing the internal strength and weakness when you strip out the capitalization weightings. Overall, Health Care continues to lead in relative strength terms, but Consumer Discretionary was the top performer on both lists after being left for dead just a month ago. When I highlighted it in the January 27th SIN Report and said then it looked better for longs than shorts at that time and the extremes were present. Even more importantly, the strength of the bounce would tell us about where we are in the trend. Those scalps turned into runners and now are making new highs. That exemplifies both the strength and rotation we are in the midst of.
I will continue to include the Subsector RS Rankings that will become part of the Sector Select level of my service in the future. Sector Select will provide access down to the subsector level on both breadth and relative strength for those who trade sectors or just like to fish in the strongest feeding lanes. Speaking of strongest feeding lanes, check out this new subsector view I created this week to show where participation is moving to and from. This is where the most focused ideas will come from.
If you click on the table, it will open a page with more. Take a minute to study how these are moving on a price weighted basis before heading over to review the Sector ETF page or even deeper into individual names for opportunities.
Sector Drill Down
As I stated earlier, I chose Financials this week due to the breadth structure I was seeing, but I have to admit part of it was hearing all the naysayers using Financials this week as the reason we can’t go higher. First of all, I don’t think that is true if enough of the other sectors participate and, secondly, the sector as a whole really isn’t lagging all that bad. The breadth picture looks pretty solid.
As a quick reminder, this is a larger sector with 6 subsectors as shown below:
Financials have many moving parts and, as we will see, the majority of them are moving fine.
The Advance Decline Line the first thing that jumps out is the Advance Decline Line broke out to new highs late last week and hasn’t looked back. This is a good sign for future progress as price usually follows such strong breadth.
Percent Days days were heavy on the way down showing a good bit of exodus into the capitulative low. We then saw a surge off those lows, a consolidation, and now attempting to move over that consolidation.
The Breadth Thrust Indicator gave a nice signal at the lows and now is clustering near the highs. No real signal, but looks like it wants to support for now.
The McClellan Indicators support more here as the Oscillator had a good surge and now consolidating. The more important Summation Index is also moving higher breaking the flatline and quickly reversing back above it. This pretty much resets the count and suggests this is a new move after a pullback.
The Moving Average Breadth is the breadth chart that gives me a more bullish view here. The 200sma reading did not dip that far and has recovered quickly while the 20sma reading is back above the top line showing strong sector participation. Those are both good, but the consolidation breakout and move above the 50% line on the 50sma reading suggest to me this sector may be ready to play catch up.
The New High – New Low Differential has not really done anything on either side since the lows. This makes sense as the sector has been muddling around a bit. A strong confirmation will be if we get the new highs starting to grow quicker here.
We can see that the early 2014 weakness took a bigger toll on Money Center Banks and Credit Services than the rest of the sector. Credit Services has recovered much quicker. Money Center Banks have been lagging badly and it just so happens they are also the larger capitalization names; hence, I think we have found our cause for the underperformance.
I continue to favor Investment Services and Credit Services, but there are many names in Regional Banks and Insurance that have started showing up on the radar the last few days. I would not be looking for this sector to remain a laggard for long, but outside of those mega names, it really hasn’t been; it is just hard to see that with the way most sector research is done. Many might look to those Money Center Banks to play catch up, and that is fine, but I believe you will find many more opportunities in the small to mid sized opportunities if you are willing to do a little digging. Below should give you plenty of a head start over the masses.
I have also added a page with all the Broad Sector Financials Breadth Charts to view them in the same layout as the subsectors above.
Here are the Financials RS Rankings:
For those who would rather dig into the individual holdings, below I have the top and bottom 40 RS ranked names in the broad sector.
If you want to dig deeper into the Individual Financials RS Rankings by sectors and subsectors, they are here with FINVIZ links for easy chart review. You may be surprised what you can find.
This should give you plenty to work with this week. I think there are plenty of opportunities right now for any trading style. As we sit now just under the highs, many are looking for a rollover which could happen, I feel congestion or consolidation is more likely before we challenge those highs in earnest. I have brought you this far, now it is your job to take the baton and run the final leg to build a plan of execution that fits you and your style of investing.
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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