*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 during the week. I do not share your email with anyone at any time.*
Previous reports can be read here.
Macro Relative Strength
We got the swift pullback we discussed last week and now we will see where it takes us. It is too early to tell if it will end soon or not, but there are many different technical confluences out there that could provide support in the short term. From there, we read the action during the bounce to gauge participation and potential. For now, the Intermarket RS list is one of the areas that looks potentially supportive. It took until last week for us to get all of the Equity Indexes back in the top half of the list as we prefer, so weakness this week could very easily have reversed that. But, it didn’t. $IWM held just above the midpoint of the list keeping the list structure favorable by a hair. Actually, $IWM also outperformed on the big drop we saw Friday which is worth noting. The Size & Style (which I will probably change in the next couple of weeks) is still a mess and doesn’t seem to be clearing up at all yet. The Macro relative strength view from these two lists is still tentative at best with the Intermarket view improving in recent weeks, but the segments are not lining up to give an all clear signal. I view the Intermarket list as the more important of the two, but need to see the Size & Style play some catch up very soon off this pullback.
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 tradeable 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.
Many leading sectors took hits this week with the broad selloff in the markets. The only dot of green we saw for the week was in the Utility sector; relatively, it was a strong out-performance on the week as it was the only sector to lose less than 2% on the week, but not enough to register anywhere in the relative strength readings. However, it does suggest the rate hike fears of last week might have shot out of the gate a little fast, but we will stay tuned there.
This is the sharp pullback I mentioned last week, but whether it will be short or not is now the question. It spanned most of this week and accelerated into the weekend and, with the terrorist attacks Friday afternoon, has a good chance of getting some continuation on Monday. We will see below that the short term readings are stretched to the downside here and support the chances of a bounce early week. Right now is where we need to be watching sectors closely and seeing where strength and leadership begin to appear. Those will be the sectors that are most likely to perform into the next leg higher. At this moment, I still favor the cyclical sectors like Technology, Industrials and Financials, but Consumer Discretionary had a rough week with the Retail route. A quick snapback in Consumer Discretionary would bode well, but there is no evidence there yet. Again, even Health Care would go in this group as it is not as defensive as it used to be and has been showing relative strength in recent weeks. I want to see relative and absolute strength off the lows of this pullback before deciding where to add exposure which is why now is the time to make your list. The pullback is playing out now, but so far I don’t think we see a major top right here. My list is still leaning to the cyclical side at this point, but the action into Thanksgiving will be the deciding factor. I hope to get positioned before then, but no rush if the indexes don’t find support and reverse early week.
Broad Market Breadth
Universe of 3,300+ 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 universe rolled over some ushering in a sharp pullback on the week. This shook up the breadth picture as most measures took a hit this week.
- McClellan Oscillator & Breadth Thrust both make b-lines to extremes.
- 80% Down day (almost 90% but no dice) on Thursday suggest a bounce within 1-3 days.
- NHNL Differential failed this week after finally resetting last week. We closed the week with negative readings in both the NHNL and 10sma.
- Advance Decline Line dove hard after making a higher high, now need a higher low.
- Moving Average Breadth saw the %>200sma move back just below 30% and none moved into top quadrant on the recent rally.
- McClellan Summation Index is rolling over and turned negative. -500 is about as low as bulls want to see it go; below that likely has bigger implications.
We got the breadth raid sending the short term indicators into extremes that often produce bounces. The rub here is the long term weakened a little more than we like to see. This puts markets in a tough spot. The long term breadth did not expand as much as you would like to see before this pullback and is now weakening with the short term measures. The tree is definitely being shaken here, but if we get some decent participation and shoring up in those longer term indicators during any bounce, the markets are still in the game for an end of year run. While optimistic buyers have been showing up when they needed to and could continue, we need to see the longer term readings respond better to any moves higher from here. If they don’t, it definitely gives more reason to worry going into 2016.
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.
Clicking on the highlighted links will go to a page with the dashboards for the Subsectors.
Sector breadth took its lumps with the broad markets this week. All sectors took breadth hits across all the levels. 9 of 10 major sectors (and 35 of 49 subsectors) have Breadth Thrust readings in the extreme zones to end the week. This much alignment shows there was not that much discrimination in the selling, but it also suggests a broad bounce is likely some time in the coming week. It doesn’t tell us anything about where that bounce may go.
We are still falling, so you want to see some positive movement before getting too active. While waiting we must gauge the action of the sectors and subsectors to see who is getting the attention under the surface. My favorite snapshot of all three time frames is the Moving Average Breadth charts which show short intermediate and long term readings all in one place. The moving average breadth shows only Technology and Financials still have over 50% of components over the 50sma while all the rest of the sectors are below that line. From a short term view, Utilities only have 7% of components above the 20sma while those above the 50sma are still around 40%. If Utilities can turn up from here as they hinted this week, the sector would get a nice breadth buy signal. Health Care has the highest number of stocks above the 20sma of any sector after taking such a beating in recent months. If Health Care breadth can continue to improve with accompanied relative strength, it could be signaling the long term trend is ready to kick back in gear.
The next chart to go to is the McClellan Dashboard so we can hone in on the Intermediate and short term time frames from another angle. The Summation is the best intermediate breadth indicator I use and when comparing them I like to see direction and relative positioning above or below zero. It still looks like many sectors made significant bottoms in August or September which we ran hard off of. Now we watch and can gauge participation as they get tested for the first time.
All in this section I suggested what could happen and what might materialize, but we closed near the lows on Friday and are likely to see some opening weakness on Monday. If these extremes are going to play out, it will be soon and the magnitude of the move off the lows should tell us a lot about our next direction and who is likely to lead. This is a process, so let it play out and do your best to listen closely along the way.
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: We are in the midst of the sharp drop that still might be fast if it stops early this week or could drag out into Thanksgiving. The stress on the markets did increased this week with the selloff and potential bearish technical patterns that are developing. If we continue to weaken, it could start to trigger more longer term sell signals that must be considered more carefully in light of the market action over the last 4 months or so. That is the worst case scenario, but for now I am still optimistic we are digesting the recent run off the washout lows and the potential to continue higher into year end is alive and well. The failed breakout of $QQQ has many getting overly bearish very quickly as most short term indicators (breadth, sentiment, put/call, etc) are hitting solid extremes to end the week. I think the potential for a strong snapback sometime during this week is likely barring any more large catalysts. If the snapback does occur, strong sectors might not give a lot of time to get on board even if the broader markets continue to move sideways for a few weeks if they get stuck in the summer ranges. You want to be ready for opportunities in sectors when they happen. Don’t necessarily wait until the broad market breaks out if you have a clean sector move triggering as that might be showing you one of the leaders into year end, especially if its relative strength and breadth are aligning with the move.
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.