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If you just want the highlights for now, check out the Executive Summary.
Macro Relative Strength
Intermarket Relative Strength turned more negative this week with all equity indexes in a race to the bottom this week. Commodity stocks are hanging in there for the most part, but this structure doesn’t help investors’ confidence at all. If this is just a pullback, we should see the equity components climb back quickly. If they linger down here for a few weeks, it suggests a larger change in structure. Equity Indexes near the bottom warrants increased caution and, if it lingers, a larger re-evaluation.
Equity Size & Style Rankings is also showing investors are more concerned as they move money into the value segments of the market. After last week’s tepid attempt at a bounce, the only green we saw this week was $DIA which isn’t terribly encouraging. The Growth and Small Caps took the brunt of the hit. Question now is, was there enough capitulation to push some extremes and maybe a real bounce to judge where we are? Similar to the Intermarket readings, if we can get a quick snap-back in the Growth rankings on a strong bounce, we might be okay. If not, this may be the change everyone has been looking for…for 2 years! Wait a bit longer to decide because the end of normal pullbacks often feels like (in both price and market noise) the beginning of something bigger. Click on the table for a deeper look into each segment. Overall caution is high right now. Now waiting to assess if normal pullback or change in structure. Tighten existing risk management, but also be looking for reversal opportunities higher just in case this is not it.
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 lost the flatline twice this week, but even with the ugly equity action, we didn’t see any expansion. Ending back on the positive side. Both moving averages are also still positive, but falling. NHNL went negative twice showing first caution here, but they have been buying opportunities on this chart.
The Advance Decline Line broke the horizontal line this week giving us our first warning here, but still above the Trendline. Participation has not fallen near as hard as it felt this week. Most damage came in a select group of high flyers. Wavering some this week, but not terrible due to the feel of the market. Still decent participation on longer term view.
The McClellan Indicators continued to soften this week. Summation Index is making its way toward a test of zero (or just below as we see on the chart). As it gets closer, the Oscillator seems to be getting near but not in an extreme reading. The question now is, do we see a larger slide down like in October 2012 or another rebound like in April 2013? I still favor the latter since we saw a deeper breadth correction and extremes in January. My experience shows extremes readings like January don’t often repeat quickly and, if they do, be on alert for a larger change. Summation nearing zero and Oscillator near an extreme. A pivot higher here or in the coming week should be a near term bottom and potentially more.
The Moving Average Breadth is nearing a signal. However, as I have mentioned, you don’t normally get extremes every pullback and when they come close together you should take notice. Nothing is for sure, but it might be an early warning things are changing. That said, with the 50sma and 200sma readings where they are, it looks normal so far and, if it can run higher from near here, then we will continue to pick our spots and trust the trend. Nearing a signal point and still looks very similar to most of the pullbacks on the chart. Trust the trend until it proves its over.
Breadth Thrust Indicator also fell hard then pivoted higher Friday after making new lows for the move. It doesn’t go to extremes every pullback, so a move higher from here could be your chance, but not as easy a signal as January. Initial pivot last week failed and made new low pivot. Same setup as last week, but worth giving another day or two so we can see if the Thrust gets out of these levels to confirm.
Percent Days now giving us two 80% down days in two weeks, but coming right before the markets attempt to pivot. The first didn’t last long, the second is now in play. We don’t want to see many more near here as that would be a negative sign. So far, putting this with the other charts, it looks like we are near a short term bottom and may get a more readable bounce soon. Two signals are okay. Once we get to four in a short period, I get more worried.
Summary: With the growth and momentum segments of the market taking such a hit this week, it felt much worse for equities than these charts are showing. That hit in those particular names may be an early warning as we are seeing larger structural changes too, or just a sign it is time to rotate. The rotation this week went to larger and safer names across many different segments of the markets. The longer term indicators are still holding up decently and the shorter term ones are nearing extremes. I would actually prefer if they turned up before actually reaching extremes since too many extremes in a short period is also a longer term negative. I am still in “gauge the bounce” mode since I don’t consider what we have seen so far to be the bounce.
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 shows certain sectors are taking the brunt here. Health Care, Technology and Consumer Discretionary have taken the largest hit on this longer term measure. This might be a good week to click through and look at each with better scaling to gauge.
Broad Sector Moving Average Breadth giving us some extremes to work with. It just so happens they are in the sectors mentioned above…makes sense. So, about now when everyone else is talking about throwing them overboard, we might just find our best opportunities to enter. A reversal will come out of these extremes and the real gauge of investor appetite will be seen at that point. The long term readings still don’t look bad to me. On the flip side, for those who want to buy strength, Utilities and Energy look to be your best bet. This week’s highlight will be Energy. We highlighted Utilities as it was looking to breakout a few weeks back.
Broad Sector McClellan Charts has been on caution for a few weeks now and many rolled this week putting the intermediate term players on notice. However, just like in the broad universe, if the Oscillators find pivot lows near here, I would not expect many of the Summation Indexes to get below zero. The Summation Indexes that are below zero now do correspond with our deepest pullbacks, but that is only 3 out of 10 sectors so far and all of the Oscillators look ready to turn.
Broad Sector Breadth Thrust are seeing the hardest hit entering the extreme range now, but it is encouraging many others are attempting to turn up before hitting said extremes. In a larger correction or more solid bear market, I would expect more of these to be hitting extremes together and spending a good bit of time down here. Watching for pivots higher to hold as we are still in a larger uptrend until proven otherwise.
The New High – New Low Differential not a whole lot going on here, but with the ugly week we saw, I would call that a victory. Until these start showing more negatives and expanding down, the larger structure looks fine.
A tough week for equities which showed up in pushing the shorter term measures (%>20sma, Breadth Thrust, McClellan Oscillator) down closer to extremes and even softened the intermediate term (%>50sma and McCellan Summation Index). That said, the longer term measures (%<200sma, NHNL and AD Line) aren’t wavering much at this point. The trend is taking a hit, but still on its feet. I am still holding out for a better bounce attempt to gauge if we are really rolling over here. Even with the damage done so far, the bulls still have a chance to keep this going, but they will need to act sooner than later.
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.
Defensive Utilities and Real Estate remained up top this week with Energy making a notable push higher. More cyclical sectors are at the bottom here. This makes sense where we are, but remember this relative strength is a 3-month reading, so it can turn quicker than most. Right now, this is suggesting a cautious investor, so unless you are looking for deep pullback plays, I would be looking at the best charts in the highest RS sectors. The rotation has been massive the last week as my RS Movers scans have been larger than normal. It will be interesting to see how long that lasts and if the rotation to larger and value based names continues. It is fine if it does as long as we have the tools to recognize it…which we do.
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
This week we are going to circle back to the Energy sector. I first covered Energy in the February 8, 2014 SIN Report where I felt it was ready to turn higher based on the charts and breadth combined. That worked pretty well as the highs were broken this week.
The Advance Decline Line has been moving higher since the dip in early March after the first attempt at breaking out didn’t work. However, after it pulled back slightly, it was a stand out most of the month. This week, the big breakout came as most other sectors languished.
Percent Days Notice since the February lows there hasn’t been much pressure on the downside at all in this sector.
The Breadth Thrust Indicator barely touched the extreme line in the early March dip, but quickly recovered and hasn’t felt any pressure yet as it ran higher into the end of the week.
The McClellan Indicators both have a nice solid look on this breakout. Above zero, but not extended. If this is any indication, Energy could have a plenty of gas left in the tank.
The Moving Average Breadth already had its pullback early in the month, but it is worth noting the short and intermediate term measures have been making higher lows for a while now which shows increased participation and better trending action.
The New High – New Low Differential gave a nice spike this week after a long rest. Notice there was a spike in New Lows last time we highlighted it and that helped mark a bottom. I think the small spike here in New Highs could mark a top, but looking at some of the underlying charts, it would take a big sector reversal quick for these not to expand more.
After being a lagging sector since last fall, it makes some sense we would see some rotation here as other areas take profits. The Energy sector has a lot of promise and is just now taking out the 2008 price highs. The broad sector looks good enough to dig deeper.
All Subsectors are pointing north with Pipelines and Integrated, Refining & Marketing already well into new high territory. Equipment & Services and Independent looking about ready to join. The wildcard (as always) is Exploration & Production. Don’t expect that to change anytime soon as it usually has the most volatility. Below I have the Subsector Breadth charts for deeper analysis.
I have also added a page with all the Broad Sector Energy Breadth Charts to view them in the same layout as the subsectors above.
Here are the Energy RS Rankings:
Remember one caveat in my Energy ETF rankings is they include Solar, Coal and Uranium which are actually in other subsectors than Energy for my custom indexes. For those who would rather dig into the individual holdings, I have the top and bottom 30 RS ranked names in the broad sector below.
If you want to dig deeper into the Individual Energy RS Rankings by broad sector and subsectors, they are here with FINVIZ links for easy chart review. You may be surprised what you can find.
Caution flags were already out, so risk management should have done its job this week removing you from some areas. That cash can now be re-allocated to emerging sectors as we move forward or held aside for better days depending on your style. If you are a very long term investor, you probably haven’t done much but take some profits and a few stops mainly because the long term trend has not changed. It is getting challenged, but hasn’t lost its footing as of yet.
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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