March 22, 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.
Macro Relative Strength
Intermarket Relative Strength is still a bit of a mess. There doesn’t seem to be much structure to point out. So, instead of fitting a story to it, I will say there is not a lot of information here right now. It is not the optimal equity structure, but there is not much of a theme in other areas either. No big standout or clues right now.
Equity Size & Style Rankings showing all the Equity segments putting in positive weeks, but it was not a cakewalk. The Quadruple Witching and FED week combined led to some extra volatility. The major indexes are bouncing, but so far it has been fairly tepid. I want to see how the coming week gets going since OPEX has the potential to skew things a bit. That said, Friday was rough for momentum stocks and if you couple that with the fact that Value indexes have made a run to the top of the RS rankings, it seems investors are taking their foot off the gas right now. It doesn’t mean they are leaving, just moving to more stable names in recent weeks. Click on the table for a deeper look into each segment. For the first time in a while, Value is moving up the lists. This is a mild caution, but still leaves opportunities in equities as long as the money rotates and doesn’t leave.
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 held it’s own for the week. Not very strong and not showing much of a loss in participation even with volatility this week. Still looking fine for now as the markets consolidate. No signals this week.
The Advance Decline Line made a strong bounce off the horizontal line this week and continues to hold the uptrend well. Price also bounced off the similar spot. First warning is breaking that line, but the Uptrend Line is more important to pay attention to for longer term positioning and we have a ways before we get through that. Holding up fine showing longer term is intact and participation remains broad.
The McClellan Indicators are in more of a consolidation mode at this point. The summation continues to slowly drift down while the Oscillator made a pivot, but hasn’t been able to capitalize on it to this point. Oscillator can still take another shot down toward the extreme zone before we are done or it can just as easily break higher. Right here in the middle doesn’t give us any edge suggesting the potential for more drift. A little caution still in these indicators, but not much of a message at the moment.
The Moving Average Breadth are still solid on the longer term readings, but the 20sma is not moving the way we might like. As already mentioned, the bounce hasn’t been very robust so far which shows in the 20sma reading. The longer it lingers, the more likely we are in for more sideways to down action. If it rolls back over here with such a big drop off in short term momentum, price would likely follow quickly. It is a bit early for us to get another extreme on this reading if the trend is to remain up. Stuck in the middle: the 20sma did pivot, but is hinting at a weak bounce which suggests we have chance for more down and maybe even a weakening of the larger trend structure.
Breadth Thrust Indicator gave us a good pivot only to stall out the end of the week. Shows a weak bounce so far, but not failed, so it makes it hard to get a read here. Got the pivot and still in play, but weak start is not terribly encouraging. Needs to kick in gear early week.
Percent Days Last week’s 80% day is still in play and there were no new signals. Last signal is still in play.
Summary: The markets moved higher this week, but not with the vigor we have come accustomed to. The FED meeting and Quad-Witching might explain some of it, but still warrants a sharper eye and tightened risk management in the coming week. I would consider the bounce so far a little weak and momentum names took the brunt on Friday. Adding those to the breadth picture suggests caution, but NOT enough to throw in the towel. I want to see how investors react now that the events of this week are out of the way. Most of March has been on the defensive and the first quarter is pretty flat as we move into the last week of both. It will be interesting to see how it ends.
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 are pretty much sideways for March. Certainly seeing continued improvement in defensives such as Real Estate and Utilities even with the hit they took on FED day. Financials on the other hand continue to motor higher. The most caution is currently in Health Care and Technology, but even those aren’t diving. Participation remains broad, but has tapered a bit in recent weeks as you would expect during sideways action.
Broad Sector Moving Average Breadth is showing more separation. Different looks here will be valuable depending on which way we break from here. The trend remains up, so I will favor those with 20sma pivots and solid longer term readings; Real Estate, Basic Materials and Energy. Health Care is the sector most are worried about and it is showing more weakness than it has in a while, but so far the 200sma reading remains solid for longer term investors. Shorter term investors can watch for the 20sma to pivot near 20% for a shot.
Broad Sector McClellan Charts I suggested last week some softening here, and that continues to be the case. The bounce in the Oscillator for many have been tepid and suggest potential for more digestion. Summations continue to drift down as the markets move sideways which is okay for now. If more than a few get near or through zero, it would suggest something bigger at hand.
Broad Sector Breadth Thrust does not and should not give extreme readings every minor blip. We did get close or touch on some sectors followed by the pivot higher. The strength of the thrust off the lows is your message here, but I doubt they are complete. If so, we will probably see a larger number of extremes on the next shot down. Only problem is there is no way to know how deep that will be. With the longer term indicators still holding strong, an extreme pivot is worth considering until they stop working.
The New High – New Low Differential all readings remained positive this week, even Health Care. There are no big warnings here.
Sector action showed mixed results this week with a lot of rotation going on. So far that rotation looks to be out of momentum names, many of which are in the Health Care (primarily Biotechnology) and Technology, but those broad sectors are not outright bearish here. Participation remains broad, just not as many were the normal high flyers this week.
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.
Once again, the sectors are showing more defensive names toward the top of the rankings while sectors like Consumers, Technology and Health Care take a rest. Financials are giving very different readings between my custom indexes and the ETF proxy. The large cap Financial names really turned it on this week moving the ETF up the list quickly. I think we are in another rotation period and it looks like it is moving more towards plays with more perceived value, but I am not sure it is moving toward large cap yet, just more value.
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
Basic Materials moved back to the top of my Broad Sector Indexes this week, so let’s take a look and see what’s going on in there. The sector only has 3 Subsectors and less than 200 components.
The Advance Decline Line broke the trend line late last year and ran higher into early March, but has stalled since. On the other hand, price did break out and continues to hold. This looks like a rest for now before challenging again. A move over the green line in the upper window would clear the long base and likely be accompanied by a strong push in the index itself.
Percent Days no usable signals here and no real clustering. A non-event.
The Breadth Thrust Indicator didn’t get any where near an extreme on the last shot down. That caught my attention as it seems short term dips are being bought quickly based on this and the McClellan Oscillator readings.
The McClellan Indicators are in a good structure as well. The summation is near 2 year highs. It has crossed down, but isn’t moving that way very fast and remains well above zero. The Oscillator hasn’t seen the extreme line since last June as dips get snatched up. All this as the index consolidates at 2 year highs after a long sideways move. This looks more like an emerging trend than an ending one (but that is not much different than what we said back in December 29th SIN Report)
The Moving Average Breadth showing a great pullback setup here after the breakout last month. It could pullback more and has room to give, but I believe continued strength in the sector is likely through this year and maybe beyond considering the size of the base we are attempting to move out of.
The New High – New Low Differential after making a significant NHNL low with divergence last summer, the indicators remains positive here and showing a good bit more new high activity while the sector consolidates.
This is one of the top performing sectors for the year and moved to the top of the Relative Strength Rankings this week with an nice smooth progression over the last quarter from 20 up to 90. Chemicals have the most solid trend. Precious Metals provided the most juice off the bottom after such a lousy year last year. Then you have Industrial Metals and Mining which are stuck in the middle; if it can break out, it has a good ways to run. I definitely want to note that the Industrial Metals have been strong, but since the Mining component also includes coal names, there has been a constant drag in this subsector. That is the beauty of the Relative Strength work on the sector as it lets you easily identify this strength under the surface.
I like select names in the entire sector, but hard to argue with the strength in Chemicals.
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:
Subsector RS Rankings
ETF RS Rankings
For those who would rather dig into the individual holdings, I have the top and bottom 20 RS ranked names in the broad sector below.
Basic Materials Top 20 RS Rankings
Basic Materials 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.
Caution flags continue to be out, but the bears just can’t seem to get traction yet across the broad markets. I am not sure they will this time either, but am watching for more deterioration before I change course. This week may be the week, then again, it may not be.
Have a great week!
G. Thomas Lackey Jr, CMT CFP®
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(All market data above are derived from Stockcharts.com, Esignal, and Reuters Datalink)
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