*If you are not on the email list and would like to review the full report each week, please email me at firstname.lastname@example.org 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.*
Macro Relative Strength
The Intermarket list continues to play out the recent rotations with $TLT & $UUP firmly anchoring the list sending the commodity spaces to the top. Equities are just waffling around in the middle. This is not the structure that best suits strong equity movement or leadership, which makes sense because we certainly haven’t seen that for a while now. But, as I said last week, they aren’t breaking down either; in fact, I am seeing more and more breakout opportunities setting up all the way from individual stocks to sectors to major indexes. Of course, not everything looks ready to run, but it looks like the correction in time is doing its job well. The Equity Size & Style is a good bit more mixed up than we have seen in a while and not giving many tells itself. It doesn’t have value plays pinned to the top, so no real reason to worry here either. Less structure in both lists as the markets continue to the time correction we have been in. We closed the week back near the top of the range. A break here sends us higher, but no clues here as to when or if that will happen.
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 were fairly benign for the week as well. There are always movers under the hood, but I do scans nightly for that. In this report, I prefer to concentrate on larger potential changes to watch for. Recently, we have discussed Real Estate and Utilities as they were tagging along with $TLT. I was expecting that to change soon, and this week’s washout and reversal in $TLT might have begun that process. Both Utilities and Real Estate had decent weeks, but Real Estate has been the better of the two in recent weeks. This week as $TLT was tanking, the proxy Real Estate held up pretty well and then turned in a solid close to the week. It took to the end of the week for Utilities to perk up. I look forward to seeing how this reversal attempt in all three works out.
There were more of the mean reversion trades we spoke of last week as well. Energy continued to take a break while Health Care climbed back towards old glory. It will be interesting to see if the reversion is about done in either of these spaces or if it becomes more. It is funny to me how many people talk about and stalk mean reversion trades, hop in and scalp a few percent and are happy. There is nothing wrong with that approach, but I prefer to leave the option open for a new trend. Every new leg starts with a bounce! The reversion part is often where the fastest move is and provides a great cushion if we can catch it, but I like to use that as a buffer to help me catch the larger move when we are in strong long term trends like now. If the longer trend wasn’t as strong, my conviction wouldn’t be either, but in these markets this idea has worked more times than it has disappointed. Health Care and especially Biotechnology have been showing this potential in recent weeks.
One final area that caught my eye this week was Consumer Staples with $VDC $RHS $PSCC $PBJ all showing both absolute and relative strength gains on the week. Those moves put all of these right back up against the breakout spots. Well, actually, $PSCC is already through its breakout as of Friday, but needs a couple of days to make sure it can hold. I mentioned them a few times on the stream this week, and would keep an eye on them.
There are still plenty of opportunities in the sector and subsector worlds if you know how to find them. Period!
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.
Breadth began to shape up again this week; it is still somewhat neutral, but definitely improved over the last five days. The moves were not groundbreaking, but were very orderly and methodical.
1. NHNL Differential positive all week with a mid week surge curling the 10sma back up and avoiding a negative.
2. McClellan Summation has curled up and will cross both signal line and zero with any further strength.
3. MA Breadth readings are all back over 50% and pointing higher.
1. Divergences I guess? … but not too much so here.
Things improved as the week went on, but in the end, I would still say neutral to strengthening which bodes well for eventual breakouts in the major indexes. With the age of the bull market, we probably should be watching closely in case it doesn’t work, but as often happens when we get older, it could just take a little longer, but the job gets done right in the end.
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.
It is powerful when the markets are hitting on all cylinders, but in real engines, the cylinders fire at different times which is what propels us forward. This is what we want to see in the markets in the form of rotation. As mentioned above, Consumer Staples had a solid week and is seeing its McClellan Summation turn up when it is below zero (a usually strong signal). We also see many other sectors with Summation Indexes turning up in support of the broader market action like Consumer Discretionary, Financials, Health Care, Industrials, Real Estate and Technology. With the neutral tone and potential for breakout in the macro view, I like to follow sectors like the ones mentioned above that are improving now and showing nascent relative strength.
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 broader markets look poised to challenge the highs and potentially break out with breadth neutral to improving. I like this setup. It should go within the next couple of weeks or fail hard into the summer. As neutral as things look, they are still slightly leaning toward the former versus the latter. Couple that with the continued rotation and nice sector, subsector and individual setups, and you may be a little bored waiting, but it is hard to be very bearish here based on the hard numbers I see.
Have a great week!
G. Thomas Lackey Jr, CMT CFP® CFS
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.