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Macro Relative Strength
This is the second week in a row we are seeing $UUP gains over 2.5% and this week $TLT surpasses that market as well putting them both in the top 3 slots in the Intermarket rankings. Interesting to see $IWM wedged right between them as it turned in a better than 1% gain even with the headwinds. None of the other equity indexes were even close for the week as they all lost a little more ground this week. The Intermarket List did get a little squirrely this week with most of the equity indexes ending up in the middle to bottom half of the list, but the Size & Style list continues to show very positive structure in relative strength terms. The Intermarket list structure is not the best for equities, but somewhat muted by the Size & Style strength. Whatever the reason, this week’s action threw most of these indexes right in the thick of the backtests we discussed last week. Pass or fail, we need to be ready for adjustments. Thursday felt like it had more presence than Friday did to me, but we still never like to see strength fade like that leaving the door open to a little more downside early week. There is some confluence starting to show up that could support a bounce around here, but as usual no guarantees. I do continue to find encouragement in the Size & Style list which keeps me leaning higher for now on all levels, but keeping in mind the very short term still has some challenges to overcome. Flexibility still remains key until things clear up a bit.
Sector Relative Strength Rankings
First, I look at the Custom Indexes and see what they are telling us on a price weighted basis.
Next, I look at a Broad Sector ETF Proxy which I use Vanguard ETFs to make sure things are similar and for some trade-able 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 (or here), it will take you to a page that will go much deeper into the Sector ETF Relative Strength.
Finally this week, we are starting to see some rotational action in the sector Relative strength rankings. Some bifurcation is certainly creeping in the markets. The top ranked are still the top and bottom still the bottom, but in the middle there seems to be a lot of shifts taking place. Technology and Basic Materials took the biggest hits while Financials and Real Estate saw the biggest RS jumps. The absolute performance showed similar results on the week as well. Overall, with 26 of 49 Subsectors positive, there were plenty of places you could have been involved in and made money. Unfortunately, in some of these, you would have needed to be in the smaller stocks in the sectors to really get the boost. If you take a look on the Sector ETF page, you will notice many ETFs in sectors or subsectors did not perform as well as the Custom price weighted indexes I use for the Subsectors. This usually suggests smaller caps are leading and is exactly what we are seeing at the moment with larger names feeling the pressure from the $UUP launch. A perfect example of this is in the Technology section where the only ETF that is sporting a green arrow on the weekly is $PSCT Powershares S&P Small Technology Portfolio. Since I am still constructive on the markets overall, it is times like these that I like to concentrate more on the RS Movers than I do on absolute strength and weakness in an attempt to pick up possible rotational changes earlier than most. In fact, the main reason I color code the RS columns is for easy flow when looking for this RS movement. Basically, we want to make sure we are not Swinging at the Last Pitch.
Broad Market 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.
Breadth took a little damage early in the week after we saw warnings to end last week, but rebounded about as good as could be expected into the end of the week. You can’t really call it a victory week for either side, as often happens, Mr. Market left just enough doubt in both sides to prevent a weekend free of concerns.
1. NHNL reversed negatives with a surge and remained positive on Friday’s giveback. The surge also kept the 10sma above zero for now.
2. Advance Decline Line holding up pretty well as it continues the sideways range.
2. Short Term Indicators McClellan Oscillator and Breadth Thrust Indicators saw solid thrusts off the lows near or at extremes and did not give majority back on Friday.
3. We had an 80% down day that saw positive reaction within 2 trading days.
4. Price is finding support at the neckline backtest.
1. McClellan Summation Index is testing zero and needs to turn higher soon to resume the move.
2. Not enough time under the reversal to tell if it has any legs or not. We don’t know yet whether this is an Earthquake, Aftershock or a Tremor, but so far tremor is my top choice.
The positives above are all based on the initial vigor of the reversal attempt. While a good sign, they only have a shelf life of a few days to a week. It is during this time that we can better assess the type of participation we are really seeing off the prospective bottom. We are back in the situation where long term looks fine, intermediate is waffling, but not bad, and short term has been near extremes in recent action. That is a bullish setup as long as the uptrend is to remain in tact. Opportunities should (and are already in some spots) be popping out and showing themselves as this potential reversal begins to take shape.
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.
Clicking on this section will go to a page with the dashboards for the broad sectors like above as well as all the Subsectors dashboards.
Taking a look at the sector breadth, we can see that there has been softening everywhere, but most of the real damage has been in spaces like commodities and more recently interest rate sensitive sectors like Utilities and Real Estate. Commodities have been here a while, but the Real Estate and Utilities issues have been stemmed by the fear of the FED raising rates sooner rather than later. I still do not see that happening and think it is actually a bad idea with easing going on in so many other parts of the world. It seems to me like it would be intentionally putting our companies at a disadvantage when the economy is wanting more. We saw $TLT snap back this week which sent Real Estate off to the races. Utilities are attempting to forge a reversal too finally, but still in the weeds for now. I have focused on these in recent weeks due to the breadth washout and good potential for a sharp reversal if the interest rate fears died down (which in recent years always has within a few weeks).
For those who still prefer to concentrate on strength, then the Financials sector was your horse this week pulling the breadth, relative strength and absolute performance higher in a tough environment. Yes, Health Care and Consumer Discretionary are right up there as well, but I would consider Financials the emerging strength player right here.
In spots like this, if you are still constructive on the markets and just trying to find what areas you want to enter, I would focus on both breadth and relative strength, but one indicator I would study more closely right here is the Breadth Thrust Indicator. This indicator does not shine too often, but when it does, it speaks volumes. It is especially nice to have it down on the sector level right now so we can see which sectors got most oversold (or never got there at all) based on this measure and which ones saw the largest thrust off of those lows. This is where the buying pressure is most intense and usually worth further investigation. Health Care and Financials never saw enough pressure to get oversold and pivoted nicely. Real Estate, Industrials and Basic Materials also saw pretty solid thrusts off their extremes. Digging deeper in these areas would be where I might start. Then you have Energy with an extreme and almost no bounce. Don’t rule a stronger one out, but for now this is telling in itself.
Don’t forget the Breadth Compilation Charts allow you to view all the relevant breadth indicators on one chart for each sector as well as the entire universe. One thing to look for is when breadth extremes line up in multiple indicators on a chart.
Final Note: While I am still open to a further decline from here, the confluence I am starting to see in many different areas of my research has me leaning toward this reversal sticking better than many think at the moment. I am looking at it as a tremor for now, which showed us some signs of an end on Thursday that need a few more days to be fleshed out. Overall, the participation is holding up well and is in many of the right sectors and segments for a positive market sentiment and subsequent action. That said, if we don’t hold the reversal attempt, I expect the next drop to potentially be a trap door that does indeed set the short term low for the markets, but that is the alternative scenario as we enter the week. If a larger downturn is in the cards, it won’t likely be a straight line after the renewed strength we saw emerge in February.
Have a great week!
G. Thomas Lackey Jr, CMT CFP® CFS
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