November 23, 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
The major indexes performed well this week for the most part. $IWM decided to add some excitement by looking like it wanted to rollover, but by the end of the week, it was right back where it started. I am still not excited about the $UUP being at the top of the list, but equities and especially commodities don’t seem afraid of its strength right now. I still feel the dollar is due for some corrective action, but each time it looks like it is starting, we get some event to shoot it back to the highs. As of now, the daily chart looks to be breaking out of a flag, so no telling when it will get some rest. Like I said, as long as equities and commodities aren’t afraid, why should I be? US equity strength has moved back towards large companies in the last couple of weeks after Small caps led off the bottom. This is not unusual, but still needs to be monitored. After resting for a week or so, $IWM reversed hard on Thursday and will need good follow through to pick back up some steam before testing the 120 level. This still looks solid overall in a relative strength basis. We do want to watch small caps for clues as December is one of their best months seasonally, so if we do see expanded weakness in $IWM, it would be a warning the end of the year could disappoint. That is not my main scenario, but one we should keep in mind just the same.
Universe 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.
The New High-New Low Differential
The Advance Decline Line
The McClellan Indicators
The Moving Average Breadth
Breadth Thrust Indicator
Percent Days
Nothing like a little flagging to regroup before challenging the highs. It is a great way for markets to prepare before attacking an important zone. The Universe has not made new highs yet like many of the the Indexes have. It is one of the reason I am not worried about the divergences yet, but that is a different discussion. I was expecting the first big challenge of this rally to come as we challenged those highs. This may still happen since what we saw the last week or so wasn’t much pressure. That said, it may not have moved price down a whole lot, but it did serve to reset some of the shorter term breadth indicators. However, it may be even more important to note that the long term breadth indicators continued to improve over the last couple of weeks which is very important. The NHNL Differential signal count is now officially reset. The 30sma moved back over zero and is now rising at a decent clip. The Advance Decline Line is probably the most concerning, but until the Universe makes a new high and the indicator doesn’t, forming a divergence, I am not too concerned. The McClellan Summation index flexed a little this week as the shorter term Oscilllator moved back to test the flatline, but as you can see, the Oscillator is passing the test and the second half strength pointed the Summation back higher. The McClellan Oscillator and Breadth Thrust Indicator are both acting very well in this. So, we have the short term indicators pulling back orderly out of overbought and holding near the midline, the Intermediate indicators flexed a bit, but have not shown any real weakness in the last two weeks, and the longer term indicators are still improving during the rest. This is a solid setup and doesn’t give us many reasons to doubt the markets right here.
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
Broad Sector McClellan Charts
Broad Sector Breadth Thrust
The New High – New Low Differential
The sector world performed well this week even in the midst of the early small cap weakness. Overall, this internal action still looks promising. While most sectors saw the breadth cool off over the last couple of weeks, we saw Basic Materials and Energy continue to firm up. I have mentioned this possibility for a couple of weeks now as these sectors can often run in a non-correlated state versus the rest of the markets. The most important part of the strength in these commodity sectors to me is the fact that they performed well this week in the face of a continually rising $UUP. They still have a long way to catch up, but if they can continue with action like this, the gap between them and the rest of the sectors can narrow quickly. Of course, we can’t take our eyes off the rest of the sectors as many of them are in a spot where the short term indicators have cooled off enough to start another leg higher. Many of the McClellan Oscillators look set up to move back higher after testing the flatline this week. One idea to combine short with long term would be to look for sectors with McClellan Oscillators that are reversing higher from near the midline that also are seeing more leadership action in the NHNL Differential. It looks like many of them are back to neutral short term and ready for another go at it. If I have to throw in a concern, it would be seeing some of the McClellan Summation Indexes hinting at a rollover. If that were to happen, it would not be good, but if the Oscillators have their way, the Summations will crook back higher soon like the Universe did this week.
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
Top 30 Sector ETF RS Rankings on FINVIZ
Bottom 30 Sector ETF RS Rankings
Bottom 30 Sector ETF RS Rankings on FINVIZ
Of course, Health Care is not done, but Consumer Discretionary continues to improve starting with Restaurants and Leisure, to Retail, and now to Home builders. It looks like we are seeing some confidence in the US consumer show up in the markets at the moment. This was not a week for huge movement in rankings, the largest drops in relative strength was Financials on one list and Technology on another list. These sectors have shown solid strength off the lows, so this might just be the entry point some are looking for into year end. That is, unless they are more interested in calling another top.
Final Note: The broader markets as depicted by this Universe have been resting for a couple of weeks up until the middle of this week when small caps kicked it back into gear. I have to call it rest, because we really didn’t see much in the way of pullbacks, but many ETFs and stocks out there have formed very good looking setups after the brief pause. These markets want more and are likely to get it even if we see a little more flattish action over the next couple of weeks. I would continue to concentrate on strong setups with the internal market structure looking very solid after the recent move. Many are saying too far too fast (I have even thought it myself for fleeting moments), but most of the measures I use to gauge that are just not confirming it. The rotation continues to happen internally keeping the broader averages firing on all cylinders.
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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