*If you are not on the email list and would like to review the full report each week, please email me at email@example.com and I will add you to the beta list. Please include your Stocktwits or Twitter handle in the email if you have one. You will receive a weekly email with the password to log in to the report and any updates there are during the week. I do not share your email with anyone at any time.*
If you just want the highlights for now, check out the Executive Summary.
Macro Relative Strength
Intermarket Relative Strength Improved this week for equities with our little friend $IWM back up just below the rocket that is Agriculture Commodities $DBA. Small Caps back leading Equities continues to fuel the rally as money is rotating well. As long as Bonds or the Dollar $UUP aren’t gaining ground, I remain content with the structure. Small Caps back in the lead for Equities and in the 2nd position supports the Breakouts and suggests there is more to go.
Equity Size & Style Rankings Small Caps have aggressively taken back 3 of the top 4 spots with Mid Cap Growth in there too. This shows there is broad action this week as last week’s breakouts hold and extend some. Growth remains the style of choice as investors seems hungry and positive about the future. You can click on the table and get much more depth into the size and style rankings including FINVIZ links for all I follow in the categories. Small Caps and Growth back on top showing strong participation and optimism about the future. The breakouts are being accepted at this point.
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 saw a nice spike early in the week and remained solid throughout. Moving averages are pointing up and New Highs continue to impress while New Lows are almost non-existent. No warnings here right now.
The Advance Decline Line surged higher as well to start the week and then held steady to end it. The breakouts are supported here as well. Strong AD Line along with strong price.
The McClellan Indicators are mixed at the moment. The Summation Index continues to shoot higher and hasn’t flinched yet, but the Oscillator is diverging here as price finds a little more volatility over the old highs. The Oscillator is much more short term and can cluster above zero for a long time as it did in early 2013 or it can spike down from here. This is a good short term signal if you get the spike as long as the Summation remains as strong as it is now. If it continues to cluster, then expect price to grind higher. Summation Index is telling us intermediate is strong and moving forward. Oscillator a little more conflicted, but not affecting things at this point.
The Moving Average Breadth are back in go mode with all three in the upper zones showing good strength. The 20sma can be watched for lower pivots for new entries as long as the other two remain solid. All positioned in the upper zones showing broad participation continues and should not be dismissed.
Breadth Thrust Indicator is still clustering as well. As I have mentioned before, this and the McClellan Oscillator have similar movement. The clustering here also suggests a grinding nature and I would use any initial spikes down as a short term entry with a tight stop in case it turns into more. No Change: Clustering during a price grind is strength. Any spike down where the Indicator drops much faster than the price can be an opportunity even if it doesn’t make it to an extreme.
Percent Days almost gave a 90% up day last week, but couldn’t quite make it. It was a more than solid 80% up day. Percent up days do not have much predictable value in my book. Some major market players suggested that the way to negate the 90% down day we saw in late January was by putting in a 90% up day or back to back 80% days. I warned back then the data I study does not support those claims. We would have missed the whole move up if we had waited! No Signal, if anything, the 80% up day suggests investors are more eager to put money to work now that we are back above the highs.
Summary: We continued to move away from the breakout point this week and saw a surge of buying early as soon as many were convinced it wasn’t a false breakout. That said, many are still looking for a failed breakout which could happen, but doesn’t seem likely with this broad participation. A back test that dips below briefly feels more likely as it would frustrate and confuse most. Breadth this strong does not usually mark tops. I expect grinding continuation for now.
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 continues to show plenty of strength to keep the markets afloat. The two that took the biggest hit this week were Utilities and Real Estate which was probably aided by the hefty drop in bonds that goosed interest rates a bit. Health Care also crooked down, but not as bad. We will look at the Health Care Sector in more detail in the Sector Drilldown section at the end.
Broad Sector Moving Average Breadth showing the short term weakness in Utilities, Real Estate and Health Care as well. The important thing to note next is how much it affected the longer term measures and, so far, it hasn’t really. This could be a short term pause or major rotation, we just don’t have the evidence to decide which yet.
Broad Sector McClellan Charts digs a little deeper and shows Utilities look like the most vulnerable as the Summation Index struggles to stay over the flatline. Real Estate Oscillator is falling so fast without much reaction in the Summation would suggest a near term low should be put in soon which could be a nice secondary entry. Health Care set up will be discussed more below.
Broad Sector Breadth Thrust we are still looking for 1-2 day sharp weakness that brings these indicators down much faster than price. After thrusts like these, usually the first shot down is bought whether it makes it to an extreme or not. So far, Utilities and Real Estate are the closest.
The New High – New Low Differential is giving me a feeling of good participation that is actually expanding as many of the moving averages on the differentials are pointing up. A few are still weak, but most holding their own or expanding for now.
The sector world is not in a structure that would suggest a major or minor top in the markets. The laggards last week helped lead this week and the leaders took a break. What more could you ask for; rotation like that is ideal. Financials and Industrials got the flow. Real Estate, Utilities and Health Care all have an interest rate component and were the weakest this week. I am not terribly concerned about Interest Rates rising fast here, so I believe these moves are more likely a pause over reversals. If the weakness in these sectors versus the broad market continues for more than a couple more weeks, we will reassess and attempt to identify any larger implications, but for now, it is just a pause. Money wants in the market and the calls that we have gone too far too fast are not abating, but getting louder. It seems to me we are likely to continue this grind until something changes.
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.
The sector world continued to move higher with Financials leading the way and Industrials right on their tail. The weakness came from Utilities, Real Estate and Health Care just as we saw in the breadth picture. This rotation is ideal for where we are. Now that we have moved back to new highs, the laggards are playing catch up. Hopefully, all those worried about Financials not participating were able to join the party this week. I think we saw our near term low at the end of January and could move further before we start worrying about the Spring/Summer correction. Not saying we will have one, just repeating the normal meme we always hear. Nothing I see here is forecasting impending weakness in the near term.
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 taking a look Health Care mainly because I am starting to hear a lot of top calls out there, so I thought we should look closer to see if the participation is waning or just some high flyers heading to the back seat for now. The Sector is split into four subsectors in which there is a lot of crossover between them making it hard to make everyone happy with my segmentation (especially between Pharmaceuticals and Biotechnology).
The Advance Decline Line has been trending higher since late 2012 and broke out in early 2013. Since then, the sector has been on a tear and accelerating in the final leg of 2013. More volatility has accompanied the acceleration making it harder to hold on during the shakeouts. Right now, the Advance Decline Line is still in a great structure that has a long way to drop before breaking the up trend line or making a lower low. Price is in a similar position. In the very short term, it might want to give more ground, but the evidence just isn’t there to do much more than take some profits off the table so far.
Percent Days are still showing the heavy side is to the buyers. The recent red days haven’t even registered here yet so the selling is not very intense yet. Often there are one or two days of heavy distribution days as the price is rolling over and then more heavy days near the bottom.
The Breadth Thrust Indicator seems to be coming down much faster than price which I consider a good sign since it gets us closer to extremes without much price damage. That is a key sign for a short term pullback.
The McClellan Indicators This is probably the breadth read that has the most concern for the short term, but then again also (like the Breadth Thrust) suggests this may just be pullback. The divergence shoring in the Summation index is a small caution, but hasn’t even crossed yet. In the past on this chart, we have seen many of those that resolved sideways versus down, but we still should not ignore it. If it crosses down, we will be watching the Oscillator for a short term low pivot. If that low pivot is bought quickly, all is good and we will continue to grind higher while the summation works off the highs. If the Oscillator pivot low is not accompanied by strong buying, it will become a larger concern. Sometimes an initial move is like the news, the reaction to it becomes more important to read than the move itself.
The Moving Average Breadth is telling us to tighten up and look for a potential short term rest or pullback, but the longer term structure is not giving reason to worry much past that. There are divergences here, but it is too early and too slight on the longer term measures to get all hot and bothered yet. Yes, others will show these charts with much more dramatic scaling, which is why I lock the scaling on these charts so we can be viewing them with a consistency that many forget about. It will alleviate a lot of false worries that come from creative scaling (which is rampant in this business).
The New High – New Low Differential has lost a little momentum in the recent week, but not really rolling over. New lows are still scarce. The only caution is the moving averages on the Differential are pointing down, but that is a very cursory head up. No big weakness showing here.
The Health Care sector has been a clear leader for a while now with Biotechnology being a rocket ship that everyone is watching. Interestingly though, Pharmaceuticals have been right there since they are so closely tied to (and heavily invested in) the Biotechnology names. That said, right now, it looks like while those are taking a rest, the Health Care Providers and Medical Equipment & Devices may be ready to take some of the flows. If so, this could help offset some weakness in Biotech and Pharma, but only for a pause. If those two subsectors want to rollover, they are likely to take the rest with them, but they are not anywhere close to that yet.
Right now, this is looking like a rest in the two hottest subsectors that could turn into a pullback just based on how fast they have risen. The key word there is could, not must. I will be watching for short term breadth indicators to get to (or close to) extremes and pivot back up. I think it would be worth a nibble there in case this is just a short term shake. If it is more, we will see it in this data and I will let you know if I think there is a real problem brewing. It is not my goal to call tops or bottoms in sectors, instead let you now if money is flowing in or out at an abnormal pace through these breadth measures. Below are the subsectors breadth charts for you to see how each is performing independently.
I have also added a page with all the Broad Sector Health Care Breadth Charts to view them in the same layout as the subsectors above.
Here are the Health Care RS Rankings:
For those who would rather dig into the individual holdings, below I have the top and bottom 40 RS ranked names in the broad sector.
If you want to dig deeper into the Individual Health Care RS Rankings by sectors and subsectors, they are here with FINVIZ links for easy chart review. You may be surprised what you can find.
I am still very constructive on the markets and believe pullbacks will remain a few days to a week for now. They can even be intraday. My point is there is still money that wants in the markets since the January lows and they are buying very broadly on each dip. The Broad Market is not showing any internal weakness currently to support any longer or deeper corrections. This should get you started. The final step to build a trade plan is up to you. Good luck, It is there for the making!
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)
The information set forth herein was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy. Neither the information, nor any opinion expressed, constitutes a solicitation by us of the purchase or sale of any securities or commodities.
There is no guarantee that the views expressed in this communication will become reality.
Investing in the stock or bond markets involves risk and potential loss of principal. Investment strategies should be thoroughly vetted and discussed with a financial advisor prior to implementing.