November 16, 2014 Strength In Numbers
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For more background on this report, the Strength In Numbers powerpoint further explains what I am building here. Previous reports can be read here.
Macro Relative Strength
Another week where we have equities at the helm. Of course, they were infiltrated by $UUP this week which is not our top choice, but equities and the dollar have moved together many times over history so it is not a problem for now. One thing of note this week should be the relative weakness in Small Caps. Overall, they were mostly flat, but since they have been the anchor most of the year, so we should keep an eye here. The volatility this week across the equity markets is showing some fatigue after the strong run, so I would be on the lookout for a little more pullback action in the near term. I would not take this as bearish for now, instead I would be looking for relative strength during any weakness and watching traditional retracement levels for the areas that have run the strongest. This is the second week that the markets somewhat ran in place. The largest stocks continued to move higher, but the troops were quiet which tells me to look for retracements and rotation. Relative strength structure still favors equities for now, but since we don’t expect a straight line move, volatility at this stage should be our friend.
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 Universe breadth picture took a break this week from the rampage we have seen over the last month. It is a little unfortunate it happened before the index made new highs, but not all that unusual. It still looks fine overall, but we are finally seeing some weakness in the short term measures as the small caps stalled a bit the last week or so. However, that is only after those short term measures hung out near the high side extremes for a couple of weeks exemplifying the strength behind the initial thrust. As mentioned, when the bounce started (the one no one believed in), every leg higher or lower has to start somewhere; the key is how it progresses. This move progressed smoothly from short to intermediate to long term breadth measures. Now, I realize the long term measures still have room for improvement, but I believe the recent move has provided the support necessary to get there. We have seen the NHNL Differential improve greatly to where the 30sma is spitting distance from going back positive which would reset the long term sell signals. Now it makes sense to watch how far the short term measures drop on this initial pause and gradually move up the ladder to the other measures to help gauge things. If the short term are the only ones that react, expect any weakness to get snapped up quickly. If by some slim chance we see the intermediate measures begin to waffle, the long term holding steady will be key. I don’t currently expect weakness to proliferate much before year end, but we always need to understand the scenario in which that unfolds so we can react if needed. We have started to see the short term weakness mentioned last week, now we see how far it spreads. Often the first test of short term breadth is snapped up fairly quickly, let’s see if that happens again.
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.
Broad Sector Advance Decline Line
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.
Broad Sector Moving Average Breadth
The New High – New Low Differential
The next couple of weeks is where we should get some of the best insight into sectors from this section. Now that we are finally seeing some pause off the initial run, we should also begin to see more separation among sectors. There is no doubt that commodity sectors are still lagging badly on both breadth measures and relative strength, but other sectors like Real Estate and Utilities which have been leaders are now showing some cracks. Or, on the other side, we saw Technology show a good bit of relative price strength for the week without much improvement on the breadth measures. Just as mentioned with the Universe, the goal here would be to watch the different levels of breadth measures during any weakness to see how they react. I am still partial to commodities playing catch up, especially if the $UUP is ready to retrace some of its monster move; but the breadth picture has yet to signal that is underway.
I am a big believer in confluence and have struggled for a while on how to better see when the breadth indicators are showing it. I have created some new charts to help better view when we have such breadth confluence for a potential washout or reversal signal. Check out the Breadth Compilation Page and let me know what you think.
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 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 on FINVIZ
Bottom 30 Sector ETF RS Rankings
Bottom 30 Sector ETF RS Rankings on FINVIZ
This week Consumer Discretionary and Technology were standouts on the sector relative strength front. Both had big RS jumps while Utilities took a dive. I believe there is a message in that change itself. Investors are getting more comfortable with cyclical and growth oriented spots in the markets. Drop down to the subsector level to get more specific places to look like Hotels and Restaurants and Retail. Then once the scenarios are coming together in your homework, take a jump over to the Sector ETF page to get some specific trading ideas or drill down into the individual holdings if that is your thing.
Final Note: Markets don’t move in a straight line forever, so now we have to wait and watch. If the markets remain volatile for a few days or a couple of weeks, spend more of your time segmenting and finding what sectors and styles are holding up the best and finding support at technically significant areas. These should go on a stalking list or into a trade plan. That doesn’t mean there won’t be opportunities along the way worth taking, but diligence and patience over the near term is likely to pay dividends into year 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)
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