March 22, 2015 Strength In Numbers
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For more background on this report, the Strength In Numbers powerpoint further explains what I am building here. Previous reports can be read here.
Macro Relative Strength
Equities put in solid performances across the board this week even though they remain scattered among the top half of the Intermarket RS list. $UUP remained at the top of the list, but that is likely to change if this week’s reversal sees confirmation. A 2.5% loss is big historically, but similar to the upside moves we have seen in the last couple of weeks. $UUP looks like it might have gotten a little ahead of itself and need to come in some, even if the uptrend persists longer term. As we have discussed in the previous weeks, the FED, Dollar and increasing interest rate arguments didn’t have the foundations many thought. If these reversals continue, it is likely to be supportive of equities continuing to move higher which is what the Size & Style RS list has been hinting to us all along. The confluence worked out and markets ran higher. $IWM already well into new highs and other majors are joining or very close. Relative Strength continues to favor equities here, especially if the $UUP continues to pullback.
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.
Top 30 Sector ETF RS Rankings
Top 30 Sector ETF RS Rankings on FINVIZ
Bottom 30 Sector ETF RS Rankings
Bottom 30 Sector ETF RS Rankings on FINVIZ
Sectors also turned in very solid weeks across almost all sectors and subsectors. The only red to speak of was Basic Materials, but at end of the week we saw those perking as $UUP started falling. Again, follow through is key in the coming weeks. Outside of that, the participation was very broad and even a few of the mean reversion subsectors put in very solid showings. I have been impressed with the strength in Health Care as a whole, not just Biotechs, Consumers are acting well, Financials are shaping up and held up well in face of the Fed, and Technology still looks relatively cheap and has broad participation underneath. Then you have Energy, Real Estate, Utilities and others that have been out of favor, but getting some love this week as well. This is not the type of action we would be experiencing if there were bigger concerns underneath. With broad participation like we are seeing, you should be able to find a few spots that fit your trading style whether that be mean reversion, buying strength or anywhere in between. Many sectors are still cutting their own path of performance and volatility, but there is a lot to work with at the moment.
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.
The New High-New Low Differential
The Advance Decline Line
The McClellan Indicators
The Moving Average Breadth
Breadth Thrust Indicator
Percent Days
There is not much to argue about with this broad market breadth picture. The buyers did exactly what they needed to at the perfect spot to reverse these markets and push us back to new highs with very solid and broad participation.
Positives:
1. NHNL Differential hit the highest value since October & both Moving averages are pointed up.
2. Advance Decline Line put in Higher Lows & is challenging the 2015 highs again.
3. McClellan Summation turned up at zero, but still needs to cross the signal line.
4. Moving average readings are all above 50% and pointed higher.
5. Breadth Thrust & McClellan Oscillator both continued to move away from zero at a good pace.
6. Price closed at new highs for the move on a Weekly basis.
Concerns:
1. Advance Decline Line needs to clear the 2015 & July highs, but this indicator lagging a bit is not that unusual.
It is pretty one sided right now to the bulls. This may not last, but that is how it looks at this point, so until that changes I remain very constructive on the broad market environment.
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.
Broad Sector Advance Decline Line
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.
Broad Sector Moving Average Breadth
Broad Sector McClellan Charts
Broad Sector Breadth Thrust
The New High – New Low Differential
Taking a look at sector breadth you can see the broad participation here as well. Sure, you can pick out Energy and Basic Materials weakness, but that is about it and even those are trying to participate. All of the short term indicators have already played out their significance, so now we turn more to the Intermediate term which looks to be shaping back up pretty well. To gauge these I would be using the McClellan Summation Indexes as well as the relative structure of the MA breadth reading focusing more on the %>50sma. These are the two that help guide the intermediate trend the best. I like to look for those about to cross and then move to the price chart to see if I can find a good entry if it does successfully make the cross. There are many of these this week, but I would also be remiss if I didn’t point out the Financials Summation Index which never really corrected and is moving higher as this sector is on the verge of a major breakout higher after a long consolidation. This is especially intriguing since this week’s Fed announcement didn’t reverse them as many expected. I could continue through many more examples, but I think it would be better for you to review a bit and figure out which spot is best for you to dig deeper for opportunities. As mentioned above, there are plenty out there this week.
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: Markets did what they needed to when they needed. The noise is always there and will trip you up if you don’t have a solid process to keep you grounded. Many will work, but I have found this data serves the best for me. I don’t have to worry as much about Macroeconomics, talking heads, the Fed or what should happen on some other fundamental level. Instead, I prefer to watch here and see what is actually happening and devise a plan to react to that. I won’t always be right, but I believe we will get a clearer message sooner than most by knowing what is happening in the markets down to subsectors at any given time. This allows us to always know when money is flowing into the equity markets, where it is rotating, and in the rare occasions when it is leaving the party altogether. I can’t imagine asking much more from a core process. Right now, that process is giving a message of strength and I believe we should listen until it changes.
Have a great week!
G. Thomas Lackey Jr, CMT CFP® CFS
Follow me on StockTwits and Twitter @gtlackey (All market data above are derived from Stockcharts.com, Esignal, and Reuters Datalink)
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