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Macro Relative Strength
This week started off being kind of coy just like most of last week and then we got a solid NFP on Friday which sent things reeling. I know, good news, bad action, but by now, this is not much of a surprise. It’s almost never the news, but the reaction that is what we should be paying attention to as investors. The shorter term you are, the more important spotting things early is. If you are a long term investor, this week didn’t even move the needle, but day traders are a different story. That is one of the big reasons I do not give specific set ups here because I believe there is information in Relative Strength and Breadth that can add value to most investing disciplines. I leave it up to you to decide which one fits your personality. This week the big story is another big 2.38% gain in $UUP keeping it atop the Intermarket RS list. All of the Equity components gave ground, but again, the higher risk $QQQ $IWM lost the least of the four majors. Dropping down to the Equity Size & Style list, we can see it is also still leaning towards the smaller companies and tilted to the Growth segments. None of this is screaming heavy fear. So far, the action fits in the short and sharp style of correction I have mentioned in recent weeks. Friday put a dent in the sideways scenario, but didn’t cause enough technical damage for big worries. This puts the backtest scenario of the previous breakout on top for now. If we get there, then we can reassess based on market action at that point. I say if because some momentum indicators I follow are heading to oversold territory fast, so a short term reversal and retest of the highs is still very possible too. Stay flexible for now.
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.
We had another week where overall equities were weak with only Health Care showing a gain for the week, but only when looking at my price weighted indexes. Health Care continues to be the leader here even on tough weeks. For the most part, this week you have to dig down to the subsector level to start and see some green popping in. With Financials and Health Care having the most green areas on a red week, it would be worth digging a little deeper there. Consumer Discretionary has also been exhibiting good strength during this which are all good signs in my opinion. The areas that took the most heat this week continued to be $UUP and $TLT (interest rate) sensitive sectors and they took it on the chin. The $UUP strength just will not relent and is creating a big headwind for commodities even with the strong seasonality and the up move in interest rates or weakness in $TLT recently has caused a good bit of damage in Real Estate and Utilities recently. $UUP is a strong trend at this point, but $TLT still feels too early to me. I am not convinced interest rates can sustain higher yet, so I will give that one a little more time to see if the higher rate noise fades quickly as it has so many times before. If it does fade, $IYR and $IDU are likely to see strong mean reversion trades as it dissipates. Admittedly, I felt it would have started by now, but it does make sense to wait for NFP to play out before backing off. I don’t see much damage here or any type of bearish rotation taking place yet, and most of the rotation right now is on the subsector level showing money is moving around inside the markets a little during this malaise. Until we see more negative structures, I continue to favor the markets moving higher intermediate term and continue to take opportunities focused in the best technical set ups along the way.
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.
Breadth continued to weaken throughout the week and ended the week showing a little more damage than we have seen since January.
1. Advance Decline Line made a new interim high before this week’s softening.
2. Short Term Indicators McClellan Oscillator and Breadth Thrust Indicators nearing extremes swiftly.
3. Friday’s sell-off couldn’t even muster up an 80% down day by the sellers.
1. NHNL gave first negative reading since January on Friday.
2. McClellan Summation did cross the signal line and is heading south now.
3. Moving Average Breadth short term reading divergence played out leaving the indicator below the 50% threshold; which is also pulling the intermediate reading down towards 50% as well.
Both the positives and negatives are pretty understandable observations here. Nothing groundbreaking as the breadth is moving with price here, but not currently leading in any meaningful way as one might expect in a larger change of character in the markets.
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.
First thing to address is my thought last week that Real Estate and Utilities were in need of some mean reversion relief at least. I mentioned looking for it, but it would also be somewhat determinant on what $TLT did. I still feel that is a good possibility, probably even a little more so now, but we never saw any confirming action on that thesis, so there was never a trade. If you tried to anticipate, it should have been accompanied by an even tighter stop for weeks like this one. With any plan, there needs to be a trigger. These may have been cocked, but never should have been fired from what I saw. Actually, they should remain cocked, because the rubberband is getting pretty stretched at this point.
That type of action though does not fit most investors. Many prefer to concentrate on strength which is certainly still present above. One of the best places to find this differentiation is with the McCellan Summation Indexes which paint the intermediate breadth view better than any other indicator I follow. The sector breadth picture this week saw some adjustments and weakening as well, but I want to point you to how quickly we are reaching extremes in the Breadth Thrust Indicators. Swift moves down like this are often associated with short corrections which would fit some of the other action we noted above. There is still some room down in the indicator, so don’t expect a magic reversal on Monday, but they are close enough to start monitoring for reversals. I will try and post any important changes I see on Stocktwits and Twitter so you don’t have to wait until next week’s report to get the news.
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 the way we ended Friday, I am cautious as many other are, but I do not have enough evidence to do anything other than monitor the action for more information. One could certainly hedge a little or lighten up exposure depending on their plan. This action very well could be a whipsaw or grow into something larger; it is just not there yet and I am not in the habit of giving absolutes anyway especially when there is not overwhelming evidence of an absolute outcome. Markets rarely if ever give those, so I don’t believe we should be expressing our ideas as if they do. The best we can do here is manage risk and and keep an eye for the subtle changes that affect your edge. The ones that affect mine are still overall positive where I am still looking for opportunities, but in a bit of a short term limbo. This isn’t the easiest spot, but identifying it allows me to prepare a plan for multiple outcomes from here. I have mine, hopefully this information helps you put the finishing touches on yours.
Have a great week!
G. Thomas Lackey Jr, CMT CFP® CFS
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