May 25, 2014 Strength In Numbers
*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.*
For more background on this report, the Strength In Numbers ppoint further explains what I am building here. Previous reports can be read here.
Happy Memorial Day Weekend! I hope you are all enjoying the friends, family, freedom and appreciating the sacrifice it took to secure those. This will be another scaled week with no sector highlight section. Instead, you have the top and bottom 50 securities in the universe.
Macro Relative Strength
It was a good week in equity land, especially with $IWO leading the week. Close behind we also had $QQQ and $IWM which led the Intermarket RS returns, each bringing more than a 2% gain on the week and nice reversal signals in the Small Cap zones. All the while, the $SPY closed at new All Time Highs. Even with all this goodness, the equity RS rankings didn’t make much headway when it comes to more favorable rankings for equities in general and risk taking. Personally, I am trusting what I see in the charts. The RS rankings have been sporting a bad structure now for a couple of months and the markets just don’t want to break. Eventually, if the bears can’t break down the markets and demoralize the bulls, we go higher; and that is how corrections in time are created. In the broad market, that is basically what we just went through. Everyone got scared and slowly lightened up over the last 3 months waiting for “better prices” until this week when the $SPY closed at new highs and performance anxiety surely hit a 2014 high point. I would call all clear until $QQQ $IWM made new highs, but there is room until that test happens. Charts are currently jumping out ahead of the RS rankings. It could mean a big failure is coming, but it is more likely we build on it higher for a bit which should catch up the RS rankings. Real test will be when $QQQ and $IWM decide to test their old highs.
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 had one negative (-19) this week on Tuesday, but improved from there ending the week back up above 40. That action was enough to not only keep the moving averages above zero, it also turned the 10sma up which is now getting ready to cross back above the 30sma. That cross does not have much predictive value, but still a positive on the margin. We still need a negative spike for me to get worried longer term, but the number of negatives so far this year suggest we should remain on notice and the easy money (if there is such a thing) has been made.
The Advance Decline Line is probably the best depiction of just how directionless the last few months have been. We moved sideways through all the trend lines, but a big drop off never came. It still could, but will wait for that evidence to materialize.
The McClellan Indicators after being my biggest worry last week, the turn up here is nice to see. Yes, it still needs to cross, and yes, it needs to get back above zero, but there are not many times it turns up below zero (and crosses) that the markets don’t move higher in the short to intermediate term; as long as we get the cross! The Oscillator might even be ready to move out of its range.
The Moving Average Breadth might be one of the best pictures of the lack of direction recently. Once again, it has another chance to move higher out of it’s range which would improve the outlook greatly. Nice to see the %>200sma turn up this week, time will tell if we can build on it.
Breadth Thrust Indicator still nothing to see here, move along…
Percent Days did put in an 80% down day on Tuesday, and spent the rest of the week climbing. Not really much to get excited about though.
Summary: By no means are the markets Lou Ferrigno here, but they aren’t Urkle either. The breadth picture stopped leaking this week and is starting to shape up a bit. The evidence of a correction in time, not price is mounting. The turn up in the McClellan Summation Index and the Moving Average Breadth is encouraging. And the longer term New High New Low Differential and the Advance Decline Line while weak are not falling out of bed. Things are pointing towards improvement into early Summer right now.
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 ended the week with everything pointing higher except Energy and I would say that sector deserves a pause. Participation is building back as we grind higher. Could turn into a chase if it continues.
Broad Sector Moving Average Breadth finally starting to see some of the short term measures ramp up while the long term readings curl back higher. Seems like the cylinders are starting to all fire again. Technology, Health Care and Financials all saw a surge this week and that is a really large percentage of the total market cap and constituents of my Universe.
Broad Sector McClellan Charts is showing us there is still a rotational nature to these markets. Notice how the Utilities, Real Estate and Energy Summations are turning down from recent highs and Oscillators are lower while the Technology, Industrials, Health Care, Financials and Consumer Discretionary have Summation Indexes that are all turning up from lows while the Oscillators are surging higher. Remember, we can go a long way if the money rotates instead of leaving.
Broad Sector Breadth Thrust the most exciting thing going on here is some actual thrusting this week, and it doesn’t hurt it is in the left for dead sectors.
The New High – New Low Differential even saw some improvement this week. The only sector to close out with a negative was Basic Materials. Technology also saw a slight expansion higher this week after a few weeks peppered with negatives. The most important thing here is no negative expansions as the markets attempt to get back on track.
There was improvement on most, if not all, of the breadth measures I follow in most sectors. Those that have been strong are cooling off, but not reversing hard; and the weak sectors got a boost this week. There is certainly still work to do, but this is a good foundation for the Universe to build back and challenge the highs. I am still focused on the improvement in the most damaged sectors as they seem to be moving out of the bounce stage into potential recovery.
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: We saw another week where the beat up sectors led the performance board, but still didn’t make a lot of headway on the RS Rankings. Any more leadership and they are likely to catapult to the top in coming weeks. The underperformance in the defensive sectors also bodes well for a continued grind higher in the near term.
Since I am not doing a sector this week, I will substitute the Top and Bottom 50 names in the Universe below. I do think these two lists further solidify why you want to concentrate on stocks with a higher price and leave the penny stuff alone. Notice below there are only three names in the Top 50 list that are below $5 while there are 29 names on the Bottom 50 list below $5. Anecdotal? Maybe, maybe not! $5 is often said to be the threshold for most institutions.
Universe Top 50 Relative Strength
Universe Bottom 50 Relative Strength
Final Note: This week’s improvement is a big help in moving higher from here after a 3 month sideways move. The confusion of the $SPY at new highs and $IWM at a breakdown point has kept many at bay. This could ignite a big chase if we keep grinding and the performance anxiety gets too great for investors. We have seen this picture before, but the ending can still change. I think we will move higher for now, but the real question is whether we just climb ever higher into the next long leg dragging everyone kicking and screaming; or if the $DIA and $SPY run higher for a bit while $QQQ and $IWM test their old highs, but fail. This is when I would be looking for the larger correction, and there is still plenty of time for all this to happen before Summer comes to an end.
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)
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.