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Macro Relative Strength
Last week, it looked like equities were about to move out and, as we have seen often over the last 5 months, those plans got thwarted. From an equity standpoint, $IWM took the majority of the hit and put in an ugly weekly candle with very little recovery on Friday. On the other hand, $SPY $QQQ did pair a large portion of their losses before we closed things out. Throw the end of the month in there and it made for some interesting volatility, but that is all it is so far…volatility. Even with a 3% hit on the week, $IWM and the other equity players remain in the top half of the list which is where we like them. The other big losers this week were $TLT and other bonds as well as $UUP. These are providing some interesting crosscurrents as we move into May. The $UUP slump is boosting commodities and their corresponding stocks while the $TLT weakness is hampering interest rate sensitive spaces like Utilities & Real Estate which we will get more into below.
Equity Size & Style rankings are getting more sloppy as the Small Caps have lost favor recently as you can see all of them are now negative over the last month. Large Cap came on strong this month and followed the seasonality in April pretty well. The shift Large Cap is fine for a while, but we don’t want this to persist too long as it usually shows up in later stages of a market move. The good part is growth is still leading which suggests to me this may just be a rest before continuation of the early year breakout in Small Cap names. The structure is still fine with Equities and Commodities gravitating to the top of the Intermarket RS list while Bonds and the Dollar are in the lower half and the Size & Style list is still hinting growth. However, the crosscurrents are strong right now forcing us to think through more specific implications from the peripheral action. I am still constructive here and looking for opportunities; and Friday’s reversal was a good start, but as always we need confirmation before diving in too deep.
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.
The rotation continues to be very palpable with this week finally throttling Health Care after it had begun to look invincible. Be very clear, no sector is invincible; they all take their knocks even if they don’t last too long or derail the longer trend. Those shakeouts are necessary to keep players on both sides of the fence which is what makes a market after all. The only green we saw this week was in Energy and Materials on the sector level and the subsector view shows the same with a few other green shoots popping up. The $UUP weakness certainly has added fuel to the commodity rebound recently adding fuel to a rebound that looked to be starting anyway. The charts in these spaces are shaping up very well and look as if the mean reversion can continue a while longer. It could even turn into more and start a new full blown trend higher, but it is a little early for that. It will be important to watch how these act next time $UUP shows some strength (which could be any time now) to help gauge the foundation of these emerging moves. The same, but on the opposite end can be said about action we are seeing in $TLT and interest rates. A very tough week in this area continuing to keep the clamps down on Real Estate and Utilities as the two most interest rate sensitive sectors we follow. I was a bit surprised by the breakdown this week in $TLT showing the fear of higher rates is growing and got traction this week. Not sure where it goes, but it will affect these two sectors along the way. I do feel we are getting close to some potential support areas in $TLT, so I will be watching those sectors for their reactions.
Looking at the subsectors, we can see the markets were skewed to the downside. There were a few respectable gains here and there, but more than a handful of big losers were down over 2.5%. This shook the tree for many. Now we watch and see what falls as we start the new month in earnest. The week was definitely heavy, but if you had been following the rotation you fared okay overall. Overweights left in the ones going out of favor still stung for sure. This is why it is so hard to be an index investor right now as the $SPY is up just over 1% on the year yet we have seen plenty of 10-20% or higher moves just over the last quarter in many top ETFs. It still seems like a great environment for longer swings or shorter position trades on the sector level until the broader indexes find direction.
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.
With the continued back and forth in the market action, the breadth did take another ding last week as we saw a sharp sell off on Thursday causing much of the damage. Interestingly, it seemed to put all the data pretty close to neutral positions, refraining from giving us any real clues this week.
1. NHNL only spent one day negative.
2. Price is still holding the breakout and uptrend started in February.
1. McClellan Summation Index crossed down, had formed a divergence and is heading for a test of the flatline.
Yes, the McClellan Summation Index has my full attention, but overall the breadth picture is giving us a wait and see view right now. Taking a few steps back and looking shows us the breadth is still pretty strong overall, but we also recognize the divergences that have been forming for a while. This is not robust strength like we see in the middle of a great move, but is also not dangerous weakness. In reality, we spend most of our time in between which is where we are now.
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.
Understanding the rotational markets we were seeing and the $UUP pointed us to the Energy & Basic Materials sectors last week as we noted they were the only ones not showing longer term strength on their respective Advance Decline Lines. Those lines are still underperforming, but the strong gains in those spaces this week are helping slowly improve the status. Energy is still the leader among the two, but any further weakness in the $UUP I believe will have Basic Materials playing some strong catch up especially if $UUP does continue to weaken and Energy decides to take a break from its strong run at the same time. This could shift the commodity trade over to the Materials space for a bit.
Health Care was the big loser which is starting to do some minor damage to the breadth here. Many are calling for a top, which may turn out to be, but as I mentioned yesterday, it is now sitting with one of my favorite MA Breadth setups. When you have the two lower windows oversold and the %>200sma still over 50% (60% here), it often turns out to just be a violent shakeout in a strong trend. I think this is worth keeping a close eye on in the coming days and weeks after such a swift selloff. It can go deeper before reversing, but the setup is beginning to materialize. If it is not going to be a positive signal, we should know in relatively short order which is why I say days or weeks.
I still think many of the cyclical sectors are also holding up well and sending us a message that the risk appetite and view of the future is still to the upside. Technology being one I see many opportunities in almost all of it’s subsectors from Semiconductors ($ALTR $SWKS) to Internet ($FB $NFLX) to Hardware ($AAPL $HPQ) to Software & Services ($MSFT $INTU) and finally Telecom & Wireless ($VZ $TDS). These are just some of the larger names I pulled out, but in my universe this sector has more than 570 components which gives a lot of opportunities that might even provide more velocity than can be offered by the big guys. The key is narrowing the field. This is where I revert back to my relative strength tools.
First, I look at my custom Indexes and rank just the Technology subsectors. Once I get that overview, I search out the RS Gainers, but this time instead of the rankings being based on the entire universe or even technology sector as a whole, they are subsector specific telling me the best movers inside each segmentation. If you click on the table, it will take you to a page with this view narrowing things down quite a bit from the 570 we started with. As I have stated often, with the number of focused ETFs these days, in most spaces you can do very well stopping at the ETF level and still catch solid moves, but for those who go deeper, knowing how to dig efficiently is key to time management in such a large crowd.
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 market took some hits this week and some specific spaces (cough cough Health Care) got run over making the week feel worse than it may have been. The end of the month selloff with no follow through though looks a little fishy to me. Looking at all my data, I still believe the markets can grind higher from here and do not have enough evidence to be looking for a longer term top. That said, we could see more sideways to down in the short term, but Friday’s reversals were a good start if they can be built on early in the week. If not, then we will track the flow and do our best to stay in the right sectors or maybe pull in a couple of our fishing poles until the waters calm, but still fishing them for now.
Have a great week!
G. Thomas Lackey Jr, CMT CFP® CFS
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