May 11, 2014 Strength In Numbers
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For more background on this report, the Strength In Numbers ppoint further explains what I am building here. Previous reports can can be read here.
This week you will see some changes in the report. I am looking to streamline the report to make it more valuable and more to the point. In doing this, I have combined some of the sections, taken out back pages, and added a few different scan views. I will also not be doing the Executive Summary this week either. I would like to get the report concise enough that reading the bold areas should be a good substitute.
Macro Relative Strength
The broad equity markets still seem to be clear about their caution. In the Intermarket RS list we see that $DIA & $SPY are ranked 2nd and 3rd with $QQQ in the middle and $IWM second to last. This continues to suggest the risk coming out of the market. Looking closer into the equity markets, we can see Small caps are still under heavy pressure in general with $IWO by far the worst performer over the last quarter taking the brunt of the action. Bifurcated market remains cautious on Small Caps and Growth while Large Caps and Value continue to take in money flow.
Universe 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 finally saw an expansion of new lows this week, but new highs were hanging right there with them. We did see negatives 3 of the 5 days (Friday being -1), but the worst reading was a -26. We also saw Thursday come in at -16 even though price was lower forming a very slight divergence, but nothing to read much into. The moving averages will be our next signal, but so far they remain positive. Bears just haven’t be able to get the expansion they need…yet.
The Advance Decline Line did break the trend lines we have been watching as well, but still moving sideways for the most part. More a longer term consolidation pattern than sell off in this view.
The McClellan Indicators giving mixed messages this week. The more important Summation Index looks weak making new lows. A move below -685 would take to the lowest point since this rally began. So far, Price is not reflecting this, but could easily play catch up on further selling. The Oscillator is holding up decently showing more muddling than anything.
The Moving Average Breadth is another place the word muddling along would fit. It doesn’t seem like there has really been enough broad movement to move this anywhere for a couple of weeks now. That type of coiling will lead to a good move eventually, but direction is not given.
Breadth Thrust Indicator still holding in the middle with no extremes to be seen on either side recently. Goes along well with the churn we have been seeing.
Percent Days is not even showing any color on the chart over the last week. Very quiet here giving more evidence to the boring churn we are experiencing.
Summary: It looks like I picked a good week to cut down on commentary because there was not much change. The warnings to be cautious are out there in more places than one. There is more churn both daily and intraday than is comfortable for most trading styles. The markets are in frustration mode, but have not broken down the major trend. Many of the risk assets are pretty oversold (they can stay that way a while) at a time when the $SPY & DIA are tapping on new highs. I think the Large Caps are in the driver’s seat at this point. If we can get a solid break through the highs, it will help bolster the oversold momentum and Small Cap names; but if we have another hard failed breakout attempt in Large Caps, then the bear flags are likely to play out over the next two weeks as oversold gets more oversold. No reason to guess which way, the markets will tell us soon enough.
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. For the first three indicators below, If you click on each respective title or the Dashboard, it will take you to a page specifically for those sector breadth charts. I did not include pages for the Breadth Thrust or NHNL this week.
Broad Sector Advance Decline Line have been a good gauge of where money is flowing so far this year. Defensives have been moving up while cyclicals are sideways to down. I do want to make note of the flattening in Utilities and Energy this week after a good run of outperformance. It may be early signs money flow there is waning. The question is will it start flowing back into the beaten up areas or just take a rest on the sidelines?
Broad Sector Moving Average Breadth is showing a lot of churn, but not a ton of movement in recent days. Unless, of course, you are Utilities. Utilities and Energy short term readings took a hit this week. On the other hand, Technology formed another set of divergences. Usually, divergences like that show early stage flow back into a sector.
Broad Sector McClellan Charts are still showing a slow drain in many sectors other than the recent defensive leaders. Half of the sectors Summation Indexes are now below zero and half holding above, but most ended the week pointing down. Real Estate would be the exception here as it holds strong.
Broad Sector Breadth Thrust only saw Technology and Health Care hit the first extreme zone this week and bounced again. This indicator shows there is not much force this week in either direction.
The New High – New Low Differential is still not particularly notable, but some are starting to show small clusters in negative territory; mainly concentrated in Health Care and Technology for now. Basic Materials also ended the week expanding a bit, but not terrible. One interesting note is Consumer Discretionary never expanded down as many expected and ended the week positive.
As mentioned in last week’s summary, the bears continued to try and capitalize on the tired markets this week. In the momentum areas they continued to have some success picking off the weak and vulnerable, but on the broad measures just can’t seem to really get traction. That could change, but I also believe bears have windows of opportunity that if they don’t seize, they get closed quickly. I am not sure how long this will last, but I think we are close to the end of that window for the moment. Still cautious going into the week, but I will say, if these Technology and Health Care divergences begin to work, I would expect the window will slam pretty quickly.
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 tradable 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, it will take you to a page that will go much deeper into the Sector ETF Relative Strength world.
We are still seeing rotation in the markets, but I see more subsectors moving right now than broad sectors which suggests to me the markets are getting even more selective when they do rotate around. That means it will be harder to play broad sectors during this churn. Being more selective, having tighter triggers, or even just doing less during times like this is what you should focus on. Now is a great time to make a list of names you want to stalk and test the waters if you are nimble enough.
Also, check out this subsector view I created to show where participation is moving to and from. This is where the most focused ideas will come from.
Summary: We are still seeing rotation in the markets, but I see more subsectors moving right now than broad sectors which suggests to me the markets are getting even more selective when they do rotate around. That means it will be harder to play broad sectors during this churn. Being more selective, having tighter triggers, or even just doing less during times like this is what you should focus on. Now is a great time to make a list of names you want to stalk and test the waters if you are nimble enough.
No Sector Drill down this week, so I will leave you with the top and bottom 50 names in the Universe.
Total Universe Top 50 Relative Strength
Total Universe Bottom 50 Relative Strength
Final Note: I enter this week with the same general thought process that we could see another quick run higher before hitting the summer doldrums in earnest. With $SPY $DIA at new highs, one scenario that could make this happen is a breakout that runs for a few days to weeks, but is not confirmed by the $IWM or $QQQ. Such non-confirmation would be a great reason for us to see more corrective action in light of where we have been so far this year. That is just one of many scenarios that can play out, but I also think it gets more likely the more people get bearish as the broad markets dance with the highs.
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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