May 10, 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
Although we ended positive in most of the equity indexes, the volatility was all over the Intermarket RS List. The Equity laggard this week was $QQQ, but for this whole pullback $IWM and smaller names in general are still the anchor. That did not improve this week at all as you look down into the Size & Style RS List. Large is back to leading with Growth still holding a slight advantage, but has been waning as earnings takes its toll on some of the high flyers. In fact, at the end of last week I was looking for early follow through. We kind of got it on Monday, but it couldn’t hold and mid week got ugly sending the noise level to playoff levels. Once it got really loud, buyers stepped in and here we are. No, you shouldn’t expect this to happen every time, but you also shouldn’t be too surprised as it has been the theme for a long while now. The extra volatility in the other asset classes in the Intermarket RS List is something I am watching as they could keep uncertainty high, but that is not always a bad thing. Climbing the wall of worry does not have a height limit, but can be measured by how early the noise and top callers start in each pullback. So far, they are still showing up on every 2% drop. Until that changes, I will be looking to take advantage of the situations. As we can see in $IWM and in my Custom Index below, basically we just had a successful backtest of the 1yr consolidation breakout we got in the 1st quarter. Equities certainly could retest the midweek levels and even break them, but until they do the song remains the same. Current lists structure is not an all clear, but still set up decently for equities with $IWM the anchor needing to get back into the top of the Intermarket RS list. That said, if these reversal hold, it won’t take long. I am still looking for opportunities under the hood in sectors and subsectors as the major indexes are still working through these consolidations.
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.
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
The sector world was active this week doing some reversion of recent moves with Energy down big and Biotech and Health Care up big. This is not anything to be too concerned about; actually, it is good to see the money continuing to flow from space to space. Yes, it is making it hard for index and macro players, but that is not my concern. If that was all I wanted to invest in, I would not take the time to do this every weekend. But, finding those movers even in a stagnant or down market is why I study this material consistently through good and bad. This action sprung Health Care back near the top of the lists as money started moving back in this week after the failed breakdown in Biotechnology. The industry may be going through a shake out of some excess, but there is a lot to like in there once you dig deeper and, even with the shakeout, most of the longer term levels and trends are holding up well. Financials were also winners this week and looking like they are ready to rejoin the party as XLF has shown relative underperformance for almost a year now versus the $SPY. Looking at some of the charts, there are a lot of good looking setups in all of the Financial subsectors which might be ready to help Financials improve their relative positioning. The rotation into this sector which has a large weighting in all the major indexes is a good sign here for the broad markets.
The move in the first half of the week in $TLT kept pressure on the Real Estate and Utility spaces, but I was encouraged by the end of the week reversal in $TLT. If it can get legs higher, I expect those two sectors to tag along, especially with the breadth setups there as we will see below. Obviously, both of these are still dominating the Bottom 30 sector ETF lists, so it is still early, but worth keeping an eye on. Health Care not breaking down was a good sign for the week. The money is still flowing around the markets to find areas of opportunity and still succeeding so far. Rotation continues, but not as well defined as we have seen in recent weeks and maybe even experiencing some reflux from such fast moves in some spaces. This should provide good opportunities in both directions or those most nimble; if that is not you, let the dust settle and wait for a break of the ranges to assess your longer view.
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
More ebb and flow continues to work the breadth into very neutral positioning. No clear evidence to be making any big calls in either direction based on this. Many are pointing to the McClellan Summation, which I agree is one to watch here, but we can see on the chart it resets near the flatline often during short pullbacks in these strong trends. It could continue lower, but a cross up from here would be worth a shot as noted by the green arrows on the chart.
Positives:
1. McClellan Summation & Breadth Thrust Indicator are not moving to extremes and closed the week near the midlines.
2. 80% Down Day found a quick reversal day instead of repeating.
3. Price is still holding the breakout and uptrend started in February.
Concerns:
1. NHNL was negative most of the week (closed positive Friday) & pulled the 10sma slightly negative for second caution signal.
2. McClellan Summation Index broke zero early week and only flattened by Friday.
Breadth working its way back to a neutral positioning in a long term uptrend. It could go either way, but too early to starting looking at this as weakness associated with a major top. Just give it some time and let it resolve. Oh yeah, and while you are waiting for the broad markets, don’t forget all the great action happening in the sectors…
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
In weeks like these when everything feels so neutral after a quick pullback, I like to look for two main setups. Last week we highlighted the short term oversold with long term strength in the Health Care MA Breadth chart when the %>20sma and possibly the %>50sma are coming out of oversold while the %>200sma remains relatively strong (preferably over 50%). These are mean reversion setups and look for short fast moves that may or may not have follow through. I do also like Real Estate and Utilities breadth setups here, but they are more washouts since the %>200sma so low as well. Both of those sectors have deeply oversold readings and could see a decent snapback, but are also being lead around by $TLT and interest rates at the moment
Secondly, I will be looking for sectors or subsectors that never got oversold breadth reading during the pullback and are moving well when the markets pops up. Sticking with using the MA Breadth chart since it shows all three timeframes, you can see Basic Materials, Financials and Technology all meet this criteria. I currently like all these spaces, but do feel digging into the subsectors is worth the time here with so many good opportunities that just don’t get the weight they deserve in the broad sector cap weighted ETFs.
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: The markets are sitting in a very neutral position right now in the midst of a strong long term uptrend. The macro headwinds are acting more like crosscurrents as everyone tries to out-think the FED and get ahead of the move. There is a place in some strategies for anticipation moves, but too many people bet the farm on them and have been foreclosed on over and over again over the last 6 years. The rotation continues, although less defined, and important levels are still being respected. Still adds up to remaining optimistic while recognizing we need to dig a little deeper and factor more volatility into our plans as it has become a staple in 2015 markets.
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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