November 2, 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
Last week we were encouraged at the improvement in the rankings by Equities, but still needed work to get to a positive structure. It took one more week. Now we see all 4 top spots taken by the equity indexes and $IWM is back on top with $QQQ right behind it. The only thing that would make this structure stronger is to see Commodities move into the middle while the $UUP and $TLT drop to the bottom, but no need to argue with what we have. In the second table, we see the Small Caps $IWO $IWM $IWN back at the top of the list followed by the rest of the growth segments. This is and has been a growth market for the vast majority of the year outside a few brief detours. Equities are back in charge with the Intermarket structure back to a strong positioning and the Equity Size & Style rankings favoring Small Caps and Growth. The action in Small Caps has been telling the last few weeks and could be a leader into year end to the surprise of many.
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
So, we got the V-bottom which had many looking for a failure. I continue to think while there was a chance of that, the breadth picture was telling a different story. Not only did we get a huge washout at the lows, the action off the lows has been impressive to say the least. Volume may could have been better, but breadth actions have been picturesque. This week new highs have returned with a vengeance sending the NHNL higher long enough to pull the 10sma back into positive territory (2 down, 1 to go) and turning the 30sma up albeit still below zero. The AdvDec Line has begun to respond solidly as well. These along with the %>200sma are the long term readings that needed to respond, and they are. Doesn’t mean they don’t need more improvement, but this is the progression we needed to see to believe this is anymore than a strong oversold bounce. This action is a good lesson in utilizing the breadth world to better read the positioning of the markets and add confidence too.
The washout served notice to get ready to take a shot; it was just too far too fast and to levels that have coincided with strong bottoms in the past. Then we got the extreme short term readings and divergences in the McClellan Oscillator, Breadth Thrust Indicator and %>20sma. Once they camped in the extremes for a bit (which is fairly rare), they began moving off the extremes and initiated strong thrusts shooting them all the way to overbought almost immediately. During this move, the Intermediate readings took notice and the McClellan Summation turned up while the %<50sma was moving out of oversold. Now this week we see another up week where the short term readings refuse to fall, Intermediate are going strong now, and the longer term readings began to kick in and make strong moves higher. We still need to see these long term readings build in the coming months, not necessarily every week. That is why I say this is the progression we needed. I don’t care how fast or slow it happens, just that it is built on the proper structure. So far, this one is.
Breadth structure and participation continues to improve greatly off the lows. This week we see the long term readings respond as needed. The short term readings like McClellan Oscillator and Breadth Thrust will give eventually, pullback and let the markets rest; but at the moment, this looks real. I expect pullbacks to be short and sharp between here and year end, but will update if we see deterioration that might change that view.
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
As the broad markets improve, we can look to the sector world to drill down and see what is going on under the hood. The Moving Average Breadth dashboard is a great all in one view of short, intermediate and long term view, but for opportunities, I would quickly slide down to the McClellan dashboard. I find the Summation Index particularly compelling on the sector level. Real Estate and Utilities made the early turns and ran, but over the last couple of weeks, all have followed. Since the turn, Financials have made a strong move worth noting. Even the greatly lagging Energy and Basic Materials got the turn and might be getting ready to play some catch up if the markets hold up. All sectors are heading higher right now at varying paces, so dig in and find the opportunities that fit your trading style.
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 world including the Top and Bottom 30 ranked Sector ETF and FINVIZ links (added below).
Top 30 Sector ETF RS Rankings on FINVIZ
Bottom 30 Sector ETF RS Rankings
Bottom 30 Sector ETF RS Rankings on FINVIZ
The standout for me this week is the move in Financials even in the face of the FED. Looking at the top and bottom ETFs this week, it is pretty clear where the action has been. Health Care is dominant with some Utilities mixed in. We are starting to see more Industrials and a few Financials on here which is a good sign and should draw our attention there. On the bottom list, Basic Materials and Energy continue to be the entire list. The contrarian in me puts this with the terrible sentiment in these spaces and has them on watch for some positive action.
Final Note: More improvement this week puts us back in the uptrend mindset. It would be great to get some back and fill over the next two weeks, but not sure how it will play out. Whatever does happen, I will be watching for the breadth reaction and opportunistic places to add to positions and exposure. You don’t necessarily want to chase too much here, but if you have a great setup, the broader picture is back to a supportive one for now. Your trade plan should take care of the rest.
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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