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Previous reports can be read here.
Macro Relative Strength
Markets bounced hard this week allowing Large Caps to erase all of last week’s losses instead of providing follow through to the downside. Large names continued to get most of the attention, but Small Caps put in a respectable week as well. The real laggards as we see in the Size & Style RS Lists were the Mid Caps. The confluence of support, sentiment and seasonality kept the markets afloat and keeps the focus on the all time highs for the big boys. From here though, the seasonality begins to favor the small caps into early January, so we are likely to see some catch up runs, but the real question is, can Small Caps get back to their all time highs? Those odds are not as good in the near term, but still possible. The current market action does favor testing highs soon in $SPY & QQQ and if they can clear their highs, then I think the next thing we look out for is where $IWM tops out. If $IWM can get close to its June high, but NOT break them, such a non-confirmation clue could usher in some selling in the first quarter of 2016. For now though, the structure of the Intermarket RS List continues to improve favoring equities over other asset classes. The Size & Style List is pointing to large growth as the standout, but the rest of the list is grouped by size with style making little difference at the moment. This doesn’t provide much support or direction from this list other than large caps are the winners here. If that continues (which it can for a while), it will be another clue we are in the upper innings of the recent bull market, but let’s wait until the small cap seasonality plays out to make any big judgments here.
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.
The rebound off last week’s selloff was nice and broad helping lift all boats, but you can definitely see there were a few spaces that got more play than others. Technology continued to lead, but Industrials and Consumer Discretionary both got plenty of attention too. Technology has been improving and looks to be a new leader here, while the other two are just resuming their positions. Technology has been a clear leader along with Consumer Discretionary before the recent Retail company raid by investors. This week that selloff reversed at support and may try to provide some support from here now with earnings season over and retail’s biggest season at our doorstep. Sure, the argument that online is killing traditional retail has some long term legs, but I doubt it persists too strongly in the next month or so, especially once the Holiday spirit gets in the air. The US consumer is still alive and well and they will spend into year end. My stance has not changed in weeks. I still think we see strength into the end of the year with cyclical and growth plays leading the way. I mentioned to look for new leaders like Industrials and Financials, but did not preclude old leaders like Technology and Consumer Discretionary from staying near the top. We are even seeing Health Care and Biotech especially setting up for a potential breakout here which would be a big help. Look at the sectors listed here; they make up over 75% of the market cap of the $SPY!
If these sectors continue to lead us, then the major indexes will come along willingly with this type of weight. You couldn’t ask for a better set of relative leaders going into year end.
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.
After last week’s shake up we saw some reversals this week working with the short term indicator setups. Now let’s see where it left us?
- Moving Average breadth reacted well to this week seeing a strong rebound in %>200sma which is needed here.
- Advance Decline line and Price both showing higher highs and higher lows. Another higher high seals the deal.
- 80% Down day (almost 90% but no dice) previous week worked as usual showing interest.
- McClellan Summation Index is slowly turning as it holds above -500 for now.
- McClellan Oscillator & Breadth Thrust Indicator both surged well off the extreme touches and Oscillator is cleared zero at close of the week.
- NHNL Differential already back into sell signals for all 3 factors. That was quick, but not deep. Still a bigger concern.
- McClellan Summation Index is negative, but see above.
The rebound this week was just what the doctor ordered and it did a good job improving a large swath of the breadth indicators we watch. The long term picture remains mixed with the NHNL giving an ominous sell signal while %>200sma and Advance Decline Line are both reacting as good as we could expect this week. The Advance Decline Line made a higher low and the %>200sma reacted stronger than it has in recent rallies. These are good signs that we are still on course and improving off the Aug-Sep washout readings.
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.
The first thing to note about the sector breadth tables above is they are all zoomed in more than in previous weeks. While looking at the larger data sets does have some value when dealing with breadth, I think we may have been missing too much of the nuance in some of the measures. This shows up the most when clicking through to the Advance Decline line page for Subsectors, but you are likely to notice it in the other readings as well.
We are getting good reactions off the short term indicator extremes mentioned last week. That is about the best you can expect from breadth for timely buy signals. Do they all work? Of course not. Do we know how far they will go? No, but the Percent Days, %>20sma, McClellan Oscillator and Breadth Thrust Indicators all reacting over a few day window is a pretty good start.
I have made it clear I favor cyclicals here, but also last week suggested that if Utilities wanted to bounce, it would be soon based on these breadth indicators and it did. One Utilities breadth indicator I specifically called your attention to was the %>20sma with just 7% of the components above the moving average, it seemed ripe. That indicator closed this week over 44%. We also saw a similar move this week in Real Estate as interest rate fears began to be digested. That bounce is happening now, but I don’t want to make any bets on how far it will go. Short term indicators suggests a short term reaction.
Moving to a more intermediate view, we look at the McClellan Summation indexes that rolled over two weeks ago are already curling back up with many above the flatline. All of the leaders above have a Summation index that has moved strong off the September lows and are handling the current pause without too much giveback which is what we want to see.
The short term extremes did play out with a solid bounce starting right out of the gate on Monday putting the process into motion once again. Now we look for the strength to continue and take setups in the sectors that fit our criteria. Industrials and Financials have shown emerging leadership in the recent weeks, but many large weighted sectors are performing well and providing support to the broader markets move. The reaction across all the breadth views here was as good as we would ask for over a one week time period and suggests more to come as the appetite for stocks into year end seems robust looking at how we reacted to last week’s selloff.
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 got the sharp drop, a little excessive bearish noise and just as sharp a rebound for much of the markets. Not much more the bulls could ask for this week. Sure, the small cap lag is still a concern, but that can change quickly and, until it does, you can lean larger. If this is a late stage move in this bull market, the larger names will probably outperform in the entirety of this last leg, but the small cap seasonality just starting in recent days can quickly change that. Be careful making that portfolio adjustment right here if you haven’t already been positioned that way. We are entering a slower holiday week which will definitely decrease volume and often provides a drift higher. I wouldn’t chase as any big moves can be accentuated by the low volume. We do want to be watching closely what sectors get the most love and which ones are shunned to see if it continues to play into our cyclical and growth theme going forward.
Have a great week!
G. Thomas Lackey Jr, CMT CFP® CFS
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