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Macro Relative Strength
After last week’s strong extension, equities gave it all back this week as we near quarter end. There still seems to be a lot of indecision on where the markets stand right now. Many pulling factors like the FED, strong $UUP, weak earnings etc, but in reality, isn’t that how it is most of the time in our society, yet alone the markets? There are always more things to be worried about. The rub is, in trading, we are forced to confront them and act (or not act) based on how we feel it will affect the markets and our investments. All of these factors and more can sway things, we just never really know how until it begins. Concentrating on the measures in this report can help really see how it is affecting things on the surface as well as underneath the hood. After this week’s reversal, it sent equity rankings further down the Intermarket RS list. This is not what we want to see, and whenever the equities move down into the lower half of the list, it is a caution flag to consider as we go through the rest of the data. $IWM is the Lone Ranger holding up in the upper rankings, but slipping on the week just the same. The top three being $SLV $TLT $UUP send their own message of worry that is in the markets. Since the $TLT and $UUP moves likely are still digesting the FED statement and Yellen’s speech Friday, they may start to settle in the coming week, especially with a lot of FED speakers on deck. I think we might get some softening to help calm things after the rate hike hype of the last few weeks. $SLV at the top is interesting to see and will be monitoring to see if it is a precursor for some Metal strength and $UUP weakness or just a blip.
Overall, those are the only things that stand out to me. We are once again going into a week where the markets trends are waffling, but not breaking in the larger cap areas while Small and Mid Caps continue to look pretty healthy even with this week’s drop. We see all of this by studying the Equity Size and Style RS List where we also can see that Growth continues to show strength in all categories as well. The Intermarket RS list is putting up a yellow flag short term, but the structure of the Equity Size & Style RS list still leans to the upside on the Intermediate and longer time frames. That said, corrections can certainly be more than 3-4% along the way, we just don’t have the evidence to expect that yet here.
Sector Relative Strength Rankings
First, I look at the Custom Indexes that I use for all the breadth work to 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.
Sectors had a tough week as well. There was some rotation as we are seeing Consumer Staples and Real Estate moving back in the last couple of weeks while Technology and Financials slip in the rankings. This helps explain some of the weakness with Technology and Financials carrying such big weightings in most indexes. There is still definitely plenty of strength out there, Consumer Discretionary being one of them, but more of the rotation seems to be coming on the Subsector levels. The markets are certainly seeing more bifurcation right now. We aren’t even seeing the normal sectors clustering together in cyclical or defensive groupings. I hear people talking a good bit recently about it being a stock pickers market, which is true to some extent, but I feel it is more a subsector (or Industry) pickers market these days. There are so many hot areas that are popping up right now one can really focus in on a theme if they choose. By digging a little deeper, we can expose where money is flowing in the markets and in many cases buy an ETF in that specialized area allowing the investor to focus the investment in a strong space without as much worry from individual company risk that one didn’t pick the right stock in a space at the right time or even worse bought right before a bad earnings or big legal issues are disclosed. There is nothing wrong with either strategy, the question for each of us is where we can get the best return to risk setups to better serve the portfolios we manage. So far this year with the markets being basically flat, you needed to move below the surface to generate returns this quarter. What level you choose to drill down to is yours to decide based on your trading style, but it is safe to say, the index investor hasn’t enjoyed the 1st quarter much. Those reading this report, on the other hand, have had many opportunities to focus allocations in strong set ups underneath the surface in either ETFs or individual securities to hopefully generate some alpha. Right now, the markets could go either way in the short term, but even if they do, there will be pockets of strength if we pay close attention and have the tools to find them.
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 markets took a hit this week dragging on the breadth some and removing many of the positives listed last week. It shifted things back toward neutral and didn’t leave us with much to highlight this week.
1. NHNL Differential did go negative this week, but it never expanded and didn’t affect the moving averages much. Very minor positive.
2. Percent Days chart never registered any extreme selling days.
3. Price remains above the neckline.
1. Advance Decline Line can’t seem to move away from this area.
2. McClellan Summation Index back on the flatline and threatening. A failure this early would be bad sign.
There are other data points I could show, but not really anything that are important or dramatic changes. None of these are real bullish this week, but the action also was not enough to move them decidedly bearish either. They are mostly just muddling for now which means nothing changes on a bigger picture. I remain constructive on the broad market environment, but am watching a little closer for signs the recent digestion is not totally complete.
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.
Sector breadth continues to give us a good read of what streams we want to be fishing in. Depending on what type of caster you are, there are still spots where they are biting. Currently, I am still focusing on the McClellan Summation Indexes and Breadth Thrust Indicators the most as I remain constructive and am looking for good long entries. Of course, during this I always have my eye on the MA Breadth chars as they give the best multilevel breadth view the quickest to gauge things. I think it should be interesting to watch Real Estate and Utilities this week to see if they can get a reaction off the Breadth Thrust extremes or if the damage is worse in those spaces. If it is worse, that will also give us some insight on where Interest Rates might be heading along with the $TLT.
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: After thinking the markets had set their path higher last week, this week they got thwarted erasing most if not all of the previous week’s gains. This puts us back on alert and takes our foot of the gas a bit, but not slamming on the breaks. The markets are still trying to find their comfort level with all the economic and geopolitical winds that are blowing around. I still believe the markets have handled them very well and buyers continue to show up when they are needed, but are not aggressive enough to push things right now. After last week’s reversal, we should be open to continuation down extending the pause, but so far the weight of the evidence does not suggest something terrible is imminent. This week is also the end of the quarter as well as a holiday week. That could add some volatility to the mix, so you might want to lay low or expect some whippy action as we move through the week.
Have a great week!
G. Thomas Lackey Jr, CMT CFP® CFS
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