March 15, 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 can be read here.
If you just want the highlights for now, check out the Executive Summary.
Markets fought a tough fight this week ending in the red, but, as usual, if you were just to listen to the Financial Pundits or the streams, you would think the top is in! And, it may be, but I have been hearing this every time the market begins to pullback. As a sentiment indicator, I doubt this is a top since so many are calling for it. Even without taking sentiment into the equation, we are a couple of percent off of all time highs and so far the breadth in these markets has remained very strong. What many of you may not know is most of the money that I manage for clients is in portfolios designed for position trading where I like to hold securities or funds for months once I enter. Sure, some of them turn into swings due to the market environment, but my goal is to hold each position until I believe it is done for now. One of the big advantages of this research for my practice is that it allows me to stay with positions through the noise and only exit when I believe a true turn is in. For some of you, I may wait too long and, yes, I do give back some gains before I exit, but that is okay. Trading your style and plan is what is important. I believe this report has something for everyone, so I don’t think you have to trade it the same way I do to get value. Let’s dig in and see how much damage was really done once we put in our earplugs.
Macro Relative Strength
Intermarket Relative Strength went back to showing less structure this week as there is really not much clustering of asset classes. It shows the market is not on a clear path and indecision is out there. Well, maybe not indecision for the week with Equities all giving up near two percent while $TLT and $GLD both gained well over 2% on the week, but definitely a risk off message. How long it continues is what matters. The fear overseas seems to keep cropping up for a day or two then dying down. I am not sure how that plays into my fear as an event versus a mindset just yet, but I am watching it closely. It just doesn’t feel like we have made it to mindset status. On the good side, $IWM and $QQQ are still leading the Equities on this scan showing a bent towards growth. Gold and Agricultural Commodities are not the best leaders, but you can invest in them and would be holding well even if you put a small piece there in the last couple of weeks. This view is giving a mixed picture still with risk off assets continuing to creep up in the rankings showing more caution. Recently, that has been short lived. If it lasts longer, this time may put more weight into it.
Equity Size & Style Rankings If we look at just Equities, Small Caps are still holding at the top, but took the biggest hits this week. Growth took the hardest knocks after being on a tear. This structure still suggests a healthy market until we start seeing Large Caps and value plays dominating the list. Click on the table and it will take you to more indepth coverage. Growth areas took the biggest hit this week, but are riding high. One week does not change a trend. Even with the hit this week, it still looks like investors are fine with risk for now.
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 has been fading since the spike last week and almost went negative on Thursday, but held with a 2 before New Highs snapped back on Friday. Remember, small negatives have been a heads up to be ready to buy once they go back positive. Until that changes, I would be ready. Losing some altitude is worth paying attention, but not acting on as there are no longer term signals here yet.
The Advance Decline Line is checking back in with the previous highs just like price is. As a longer term indicator, this is normal. If we lose the test, the TL is the next stop, but note how far we are from lower lows. I do want to make a note based on some work by @Ukarlewitz on twitter discussing the AD Lines lack of ability to signal corrections. I agree, it is better with major tops and often your signal is a massive drop in the AD line peak with a slightly lower price price high. This is not officially a divergence, but often accompanies notable highs. Backtesting the recent breakout and holding for now. A move back higher next week clears any worries for now.
The McClellan Indicators The mix has flipped for now. At this point, the Summation Index has crossed showing more short to intermediate loss of momentum, but as you can see, that can signal a sideways move just as often as a pullback. It becomes more of a concern for larger pullbacks if it starts falling fast or crosses the flatline, but even that hasn’t been too bad during this run. The Oscillator is now getting near oversold, so I will be looking for a pivot higher. Short term traders can use this for scalps while longer term investors might dip a toe in if we get the pivot. Either way, make sure your risk management plan is solid because these are not heavy extremes. Summation has now crossed down suggesting more caution here, but the Oscillator is nearing the range. It might be worth taking a shot if it can pivot higher. Your time frame will determine better how you handle this action.
The Moving Average Breadth are showing a classic pullback move with 20sma readings coming down fast while the 50sma and 200sma readings are holding well for now. I know many are worried about the divergences, but usually wait until we get a failure swing (a high that does not pierce the upper line) before worrying too much. That goes with the quick drop in participation discussed above in the ADLine section. Right now, the 20sma has entered a zone that you can look for pivots higher accompanied by the shorter term indicators pivots to look for new entries. Coming off this week with the market weakness and still showing a solid structure to me as no failure swings are apparent. That suggests pivot lows in the 20sma readings should still be considered.
Breadth Thrust Indicator gave us the spike down this week with the market weakness and made a pretty big move for such a small price move which is what you want to see. Now we look for the pivot low at or near extremes. Friday may have been it, but price really hasn’t followed yet. If we move out hard Monday, I will put much more weight in this pivot. We got the spike down we were looking for, so now we want a pivot higher (which may have happened Friday) to start working new opportunities.
Percent Days gave us an 80% day on Thursday’s sell-off, but not really too heavy there, so I wouldn’t put too much weight into it. That said, the last few we got were either the day before the bounce zone or preceded one more quick shot down before price reversed back higher with the exception of the Mid January 80% which we considered a 90% day with rounding. The main thing we don’t want to see here is clustering of these days as that can often accompany larger corrections. We did get an 80% up day which could mark a bottom if this is just a shake. Not putting too much weight in it yet.
Summary: The markets definitely softened this week in both price and breadth, but not enough yet to starting sounding the alarms. More caution is warranted until we start seeing the short term indicators pivot back higher which can happen at any time. I believe the message from pullbacks comes in the bounce that follows them. If the bounce has vigor like the February bottom, things are fine. If it is anemic, then we increase the caution. It is like when people talk about the reaction to the news being more important than the news itself. Look at the initial leg down of any high as the news and gauge the reaction to that news for your next move.
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 is starting to get a little more mixed as well. Most turned down this week with the major indexes, but none enough to look for major issues yet. Not even Health Care where everyone is suggesting the Biotechnology pullback is a sign of the end. So far, it is all relative and a bigger run higher is likely to have a larger pullback. That is just math. Utilities and Real Estate are the standouts this week as rate sensitive areas are back in play. This can be risk off, but over the last few years has more been a chase for yield. Not sure which it is this time yet, but I favor chase for yield being the culprit with the rest of the participation remaining so strong.
Broad Sector Moving Average Breadth remains such a great picture of what is going on. Yes, the short term has weakened, but for now that is all we can say. The intermediates are holding pretty well and the long term measures remain solid. I would like to note that the 50sma readings for Health Care are about to test the 50% with 20sma reading nearing oversold. How it reacts over the next week should help clear up if it is really rolling over for now. If we get a hard bounce off this zone, I would not bet against the sector yet.
Broad Sector McClellan Charts are looking a little weaker from an intermediate standpoint, but the Oscillators are worth noting. When we see price fall a bit and the McClellan Oscillators fall fast, we can often see a more shallow pullback. Many of the Oscillators are nearing extremes and are worth paying closer attention to. This week it may be worth clicking through and looking at the full set of charts with the indicators on them to better gauge where each sector really is. We may have already started getting the pivots higher, so be ready to act early week if market strength resumes.
Broad Sector Breadth Thrust have given us our short term spikes down. Now we look for the pivots back higher. Many may have come Friday, so be ready early week in case we move higher quickly. However, most are not at extremes yet, so make sure you allow for one more shot down in your plan. Either way, I think we are getting close to a bounce that will help us gauge where we are.
The New High – New Low Differential gave very few negative readings during the pullback this week. Health Care didn’t even go negative. The weakest seemed to be Energy, but as you can see, it has been stuck in the middle for a while now. This chart actually makes me feel pretty good about where we are right now. No real weak outliers cropping up yet. Also, note if you click through and look at the charts, windows on each chart are not scaled the same, so always reference the scale on the side and not just the length of the bars.
The sectors came down with the broad markets this week, but there were a couple of standouts. Utilities and Real Estate were the most solid showing some defensive nature. The more cyclical areas and those most extended took the biggest hit which shouldn’t be a surprise to anyone. Money is still rotating within these markets and, as long as that continues, we will do fine if we follow it.
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.
As you can see from a relative strength perspective, the sector world has turned a little more defensive as well in recent weeks. Here the cyclical sectors are taking the larger hit as well. This is definitely a caution, but also normal in the beginning of almost every pullback since those are usually the sectors that move the most on the way up. For longer term money, it is too early to say if this is a move to defensives that will usher in a larger correction, especially with the Equity Size & Style RS holding in a strong structure. I added the Equal Weight RS to the front page to show you from this view some of those cyclical plays are still holding up okay on the RS measures. That suggests to me there are still good opportunities if you are willing to move down into the smaller names.
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 segmentation. 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
Health Care continued to correct with the markets and got a lot of attention from top callers this week. Makes me think it is near a short term bottom at least. This week we are taking a look at the Utilities sector since it was the definite standout. This is my smallest sector and the Water Subsector only sports 7 holdings, so keep that in mind when looking at the breadth charts.
The Advance Decline Line broke higher out of the Descending Triangle in February and stalled out into early March only to surge higher this week as the rest of the markets fell. This was a definite stand up and take notice moment for this sector….so we will. Neither price nor the AD Line have made new highs yet, but they are both getting close to significant resistance that if they get through will clear the 11 month base that has been formed (yes, about the same time everyone started worrying about the taper).
Percent Days are fairly useless on this chart since there less than 100 companies. High percentage participation in swings are the norm. Let’s move on.
The Breadth Thrust Indicator even came down and made a minor extreme last week while no one was watching (including me). I love the look of this chart after the February fade. Looks like it is ready to challenge those highs after this thrust.
The McClellan Indicators are also wanting more as the Summation Index just crossed above zero in early February and is now curling back up on this surge. It has plenty of room to move higher if it wants. At the same time, the Oscillator has now put in two pivot lows above the extreme zone showing buyers are not waiting too long to scoop up any weakness.
The Moving Average Breadth is pointing higher on all levels and the oversold touch of the 20sma was bought quickly and fiercely. Look how well the 50sma reading held up on that last move down after a year of back and forth. There is real participation coming in here right now. How long it will last no one knows, but if it breaks out, it is certainly worth a shot and could provide some relief if the broader markets continue to be soft.
The New High – New Low Differential is starting to perk up recently with a few new highs, but more importantly notice how there were very few new lows on the recent pullback which is more important to the recent structure. Not too much weight here with so few companies represented, but still has a message if you are paying attention.
The Utilities sector has been dormant since last spring when everyone started focusing so much on the FED and taper. Rising interest rates will siphon money from this sector, but I have been expecting interest rate pressure to subside since the taper began back in December. I focused on Real Estate first since it seemed to offer the biggest bang for the buck, but it looks like Utilities have been a good play too and are starting to come into their own. I still believe interest rates will remain tame for the remainder of this year at a minimum; therefore, if we get the breakout here, it could have legs as it has some catching up to do.
From this look, the Water Utilities are the strongest, but with only seven companies there, that is hard to rely on. The rest look similar with Gas ADLine closest to the breakout. I don’t really have a favorite here to tell you the truth. I would just look for the best charts since there are only 93 to scan through. That shouldn’t take long if you are diving into the sector. Or use one of the ETFs listed below if you want to participate.
I have also added a page with all the Broad Sector Utilities Breadth Charts to view them in the same layout as the subsectors above.
Here are the Utilities RS Rankings:
Subsector RS Rankings
ETF RS Rankings
For those who would rather dig into the individual holdings, below I have the top and bottom 20 RS ranked names in the broad sector.
Utilities Top 20 RS Rankings
Utilities Bottom 20 RS Rankings
If you want to dig deeper into the Individual Utilities RS Rankings by sectors and subsectors, they are here with FINVIZ links for easy chart review. You may be surprised what you can find.
We saw a few more caution flags come in this week, but nothing enough to derail the markets so far. We are still very near all time highs and holding the February breakout level. I may sound like a broken record, but this action is just not enough for me to turn bearish yet. If it continues and we see more internal weakness, I am fine changing that stance, but it has to prove it to me first. This should get you started. The final step to build a trade plan is up to you. Good luck! It is there for the 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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