May 18, 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 be read here.
Last week’s changes seemed to work fine. This week we do have the Sector Highlight back, but no Executive Summary. I am going to continue to use bold highlighted text at the end of each section as a substitute. I think that worked well, but if you don’t think so, please be sure to let me know.
Macro Relative Strength
The Intermarket Relative Strength rankings took a turn for the worse this week with $TLT making it to the top spot. Couple that with $IWM being 2nd to last, not a high risk atmosphere. Focusing specifically on equities, we really didn’t see much of a change in the Relative strength rankings, but it is worth noting that the only two green for the week were $QQQ & $IWP and then next in line was $IWO which currently ranks last. This certainly could be a flash in the pan, but keep an eye on it early week. Both RS rankings are still suggesting great caution, but is worth noting higher risk equities did outperform on the week.
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 continued to see some negatives this week which is pushing the Moving averages ever closer to a signal, but Friday’s positive arrested it for now. Any more negatives in the reading is likely to sink the 10sma into negative territory. However, notice this week we did see a slightly lower price than last, but the numbers of New Lows in the Universe contracted. The problem is New Highs didn’t expand, but I still think it is worth noting.
The Advance Decline Line is aiming to frustrate I am convinced. It is breaking my trendlines on a sideways move not really falling. It is still breaking them though on the indicator and price, so it keeps up another caution flag on these markets. This could be the calm before the storm or just more rotation. Either way, it is frustrating many participants (admittedly, including me).
The McClellan Indicators this might just be the most worrisome chart to me. The summation index continues to lose ground and has made lows not seen since 2012. It’s not the end of the world, but takes away a good bit of confidence from the medium term outlook if it can’t shore up fast. The Oscillator just shows you there has not been a ton of pressure on either side the last couple of weeks. I am looking for a thrust one way or the other to change the short term action.
The Moving Average Breadth gave us the pseudo buy signals back in mid April, and have actually held since then. However, it is troubling to see the %>200sma continue to drift down to the 50% level while the other two are making higher lows, but can’t seem to get comfortable back above the 50% zones.
Breadth Thrust Indicator nothing to see here, move along…
Percent Days nothing to see here either. It has been very calm this week; and mostly that way since the last signals.
Summary: The breadth charts continue to fly caution flags all over the place. It is interesting to see that all of the extreme readings from mid-April remain valid; we just haven’t really been able to capitalize on them at all yet. There is some precedent to a delayed reaction, but also a few similar instances that will thrust down for one more flush before a meaningful bottom is put in, so don’t put too much weight there. I believe this suggests you look for more select opportunities at this point, but remain tight and very skeptical of them until the breadth improves more.
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 continues to show the weakness is concentrated in a few sectors. Notable the strength continues to be in defensive sectors. Basic Materials took a turn for the worse recently. It is also interesting to see the ADLine for Financials does not look nearly as bad as the current rhetoric on this longer term measure.
Broad Sector Moving Average Breadth seem to be stuck in the muck. Here Financials had a tough week, which doesn’t bode well there. Real Estate continues to show the strongest action.
Broad Sector McClellan Charts didn’t change much this week. Unfortunately, many continued to leak down, especially those already below zero.
Broad Sector Breadth Thrust only saw Industrials and Financials hit the first extreme zone this week and bounced Friday. Continues to lack force in either direction at the moment.
The New High – New Low Differential still a mixed bag. The weak sectors are still showing negatives, but nothing extreme to speak of.
There is not really a lot of change to speak of this week. The longer we go without breaking down as so many expect, the more I expect us to move higher soon. None of the sectors are screaming that is coming this week, but they are all holding up pretty well. I continue to believe Health Care and Technology are showing some very faint signs of improvement and should be watched closely. Overall though, caution is still warranted.
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.
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: This week, for the first time in a while, Technology and Health Care were the top performers. They remain the worst Relative Strength across pretty much all my measurements, so don’t read too much into it yet, but as oversold as many are, I think it is time to pay attention. If those two do improve markedly, then the overall markets are likely to go with them for a bit. Continue to have tighter leashes or just do less. For those inclined to look for deeply oversold opportunities, the two above look pretty ripe.
Sector Drill Down
As I mentioned above, the two sectors I am focusing on if the markets want to improve are Technology and Health Care. I highlighted Technology a couple of weeks ago and it has been mostly sideways to down since then. This week we will look at Health Care. The breakdown is:
The Advance Decline Line has remained rather weak since topping out in late February, but is now coming into some support in a previous congestion area for the indicator. You will also see a longer view this week. I believe it adds some perspective to this sector view.
Percent Days Note we put in some extreme spikes in mid-April and since then have been meandering higher.
The Breadth Thrust Indicator hit a minor extreme last week while making a slightly higher low in both the indicator and price.
The McClellan Indicators still have their issues, but seem to be basing a bit down here. The summation index is pretty low by recent standards and looks like it wants to stabilize. That is not rising, but it has stopped falling after a quick descent. The Oscillator has been hanging higher on recent market pullbacks.
The Moving Average Breadth has been putting in divergences on the %>20sma and %>50sma readings, but both remain depressed. This shows short term improving while long term readings are not that inspiring either, but in an area they should stabilize if the longer term trend is to remain intact.
The New High – New Low Differential the negatives here have been higher than in other sectors recently, but still not impressive. No big divergences yet, which could still come, but don’t have to if this was just an intermediate repricing.
The Subsectors view below shows all have come in, but Biotechnology has really taken the brunt of the action. Pharma definitely felt the pressure too, but have been improving quicker.
As I said, this is a leader, but has been stabilizing in recent weeks and this week showed relative strength over the markets and most sectors. Below are the Subsector breadth charts for review:
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:
Subsector RS Rankings
ETF RS Rankings
Pharmaceuticals seem to be the standout, but most had a positive week.
Top 40 Health Care RS Rankings
Bottom 40 Health Care RS Rankings
If you want to dig deeper into the Individual Health Care RS Rankings by broad sector and subsectors, they are here with FINVIZ links for easy chart review. Note larger Subsectors do not expand well for better viewing, so for those lists I suggest using FINVIZ for closer examination once you have looked at the rankings on the main page. You may be surprised what you can find.
Final Note: The markets ended the week on a decent note. If it leads to a move higher, I think it is time for Technology and Health Care to try the mean reversion game, so I will be watching those closely. If we can’t get any strength off these bounces soon, my theory will be squashed and it will increase probabilities of another leg lower into the early summer. I still lean slightly higher before lower.
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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