May 24, 2015 Strength In Numbers
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For more background on this report check out Strength In Numbers Explained. Previous reports can be read here.
Macro Relative Strength
The action this week wasn’t earth shattering, but it was enough to move all the Equities back up into the top half of the Intermarket RS list with $IWM $QQQ performing the best. We go into the short week with a decent (although not optimal) structure here with Commodities and Equities at the top of the list and the Bonds at the bottom. $UUP hanging out in the middle of the list after a strong rebound this week, but looking a bit unsure at the moment of its next direction. The Equity Size & Style RS list also saw a gradual shift back to the smaller players and a slight bias to growth is still present as well. This is not a bad situation here either for equities going forward. Another week of muddling as we head into the slow days of summer. Markets are still holding near all time highs and continue to thwart attacks by the bears with minimal effort. This could always change this week, but until it does I continue to bias to the upside based on the above information.
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
Sector weighting can be an important thing to keep up with when thinking about how the Sector RS is structured. Currently, we see that the top 4 sectors are Health Care, Consumer Discretionary, Technology and Financials which are also the 4 largest weighted sectors in the $SPY according to ETF.com breakdown. Does it surprise you to see these 4 makeup over 60% of the index? These are the 4 horsemen of the sector world and, if they are charging forward, don’t be silly enough to bet against the broader markets.
If we look above, we can see the Top 30 Sector ETF list is dominated by these sectors as well and this is where I would look if you are a strength player. We do some of this in our portfolios, but that doesn’t mean we don’t look to find opportunities in some out of favor areas. I am still keen on watching for the interest rate sensitive sectors to get legs here sooner than later, but it has taken longer than I thought it would (what is new when it comes to the markets…). Markets are still holding in well and have the right sector leadership to help move the broader equity markets higher.
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
Breadth overall improved a little more this week from what I see. It wasn’t gangbusters and it did set up a few cautions to watch. Being in a neutral to higher breadth picture is a difficult one after the long run we have seen. On one hand, it is still holding up with the markets overall, but the long run bull market we have seen and the recent consolidative action has many looking overly hard for the warning signs. When they find them, they feel the need to trumpet them from the highest mountain for all to hear. I prefer a weight of the evidence approach, and at this time it still points me to an upward bias for now.
Positives:
1. NHNL Differential put in a decent week and the 10sma is crossing above the 30sma.
2. McClellan Summation signaled last week from below zero and also crossed back above zero, completing both buy signals on this indicator.
3. MA Breadth readings are all back over 50%.
Concerns:
1. McClellan Summation Index is rolling over slightly just above zero. Needs to revert back higher before a cross sends a stronger warning.
2. Advance Decline Line is still lagging a bit, but this is a very minor caution as it often plays catchup.
Things improved a little more this week, but still in a slightly better than neutral positioning. Any continued grind higher in the markets is likely to keep us on this course of slow improvement.
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.
Broad Sector Advance Decline Line
Broad Sector Moving Average Breadth
Broad Sector McClellan Charts
The New High – New Low Differential
Clicking on the highlighted links will go to a page with the dashboards for the Subsectors.
The sector breadth picture looks similar to last week. For most sectors, I continue to focus most on the McClellan Indicators to find improvement and see many of those Summation indexes did cross higher this week. Pay attention to those as they are usually strong intermediate signals. However, from a pure breadth setup, I like the look of the Energy sector the most. Especially, the MA Breadth setup with the %>20sma near oversold with %>50sma above 50% and the %>200sma is trying to come out of oversold for the first time since last year. If we get renewed strength here in the coming weeks, strap in as I believe it will suck in many of the doubters during the initial rise off the bottom we got at the beginning of the year. Doubters can be your best friend in a potential new trend. Sector Breadth still strong in most areas and supporting the markets. Areas that are showing the most weakness like Utilities and Basic Materials also have the smallest weightings in Indexes which lessens their impact a lot. As long as the growth sectors continue showing RS and strong breadth, we look to take advantage where we can.
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 continue to challenge the highs and even though they are seeing intraday battles at this level, the overall relative strength and broad participation continue to have me thinking we see another extension higher before we see any major correction. How long that move higher lasts, no one knows, but it is our job to take advantage of it until the data shifts the weight of the evidence away from the trend continuing. For now, we have no such evidence, so don’t let the noise keep you from taking opportunities while they are here.
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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