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Macro Relative Strength
The short holiday week is now behind us and the markets held up well, but disappointed a few by not going straight up for the week. They must not have been paying attention to the small caps or listening in recent weeks either. This week took those who had leaned too hard to the large caps and teased them with the thoughts of new highs while the $IWM continued to play catch up. Overall, most of the major indexes were flattish on the week, but Small caps turned in better than 2% returns leaving the rest behind. This action helped the Intermarket RS lists continue to strengthen now with all 4 equity proxies in the top 5. Of course, the rub there is the other one up there is $UUP which also gained over 2% this week. We are not used to seeing $UUP stay this strong with equities performing well, but it can and has happened many times in the past, so it is not out of the question. The Equity Size & Style RS List is not shaping up as well as we have seen it in past rallies. I am not sure if this shows a broad based move or more dysfunction at the moment, but we would prefer for it to begin to align more from small to large and growth to value to really open things up. The Intermarket list structure is favoring equities again as all of the names are solidly in the top half of the list. The Size & Style list continues to move all over the place (I still want to improve the components here to see if we get better results with more pure plays), but did see nice moves higher in the Small cap segments. We would like to see those Smaller names move up the list as we move into December.
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.
We don’t want to read too much into the sector picture during the short holiday week. There were still a few things that stuck out this week. First was the outperformance by Consumer Staples, especially food and beverage. Staples is a defensive sector, but has seen some recent strength in small cap names in the space like $ANFI, OME and $BREW under the surface. Some large players are stepping back up and shining like $K $HRL $TSN and especially $CPB. The bigger players are coming to life, but aren’t known as fast movers, so if interested in the space, I would continue to focus on the smaller components that are setting up or use an ETF like $PSCC or RHS which are leading the space in the ETF Rankings. This also plays well into the Small cap seasonality we are currently in. I focus on this as a standout this week, but still believe it will not be a market leader in the near future as I continue to favor cyclical sectors into the new year. Other performers for the week were Energy and Health Care which remain poorly ranked at the moment. Energy is still basing out trying to decide which direction to go while Health Care does look to be shoring up with Medical Equipment $IHI being the top RS in the space right now with Biotechnology $XBI also perking up well.
On the other side, Utilities and Technology were only two to give much back this week. Technology just looked like it took the whole holiday week off while Utilities continue to be rejected on each attempt higher, but aren’t breaking down either. This range shows the dilemma over the economic outlook and potential rate hike from the FED. This sector probably has the most crosscurrents in this environment as a place to chase yield when rates are low and the potential to struggle with debt burden and output if rates increase without the economy showing marked improvement. Watching the potential flag in $XLU is all we can do for now. Investors will make their decisions on Utilities as we move toward the December FED meeting in coming weeks (yes, I am still in the lower longer camp and a raise in December is NOT a given). Unlike Utilities, Real Estate is performing pretty well during the rate dilemma and is probably the better of the two right now.
Don’t read too much into this week, but the RS message continues to lean toward cyclicals with Technology, Industrials, and Financials all near the top. For those looking at swing trades here, don’t be afraid to play some of the small cap or equal weight sector ETFs listed on the Sector ETF RS Page. Smaller names in strong sectors could provide a potential boost from the small cap seasonality in coming weeks. It is really something wonderful when we can quickly search out and find a security (ETF) that is so focused on a specific theme yet still give us diversification to ease some of the individual company risk involved.
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.
Universe breadth performed well this week even with the major indexes flat. This kind of quiet improvement is always welcome. Let’s take a look:
- NHNL swung back positive this week by a little. Moving averages pointing up, but still negative.
- Moving Average Breadth all pointing higher with %>200sma making new high for the move.
- McClellan Summation Index crossed the signal and zero this week.
- McClellan Oscillator & Breadth Thrust Indicator still pushing hard off the extremes last week.
- NHNL Differential is still anemic and needs all 3 signals positive to reset the count.
- Advance Decline Line and Price both need to make a higher high here to come off the concern list, but both are really close.
The Universe followed Small caps with a solid week improving most of the breadth pictures all the way up the spectrum. The %>200sma and McClellan Summation are two showing very important improvements at this juncture helping shape up the intermediate and long term possibilities from this point. Expect some ebb and flow, but as long as we stay on this path it continues to confirm the major bottoming action in the August/September breadth washouts and divergences similar to what we saw in 2011.
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 continues to improve off the fall lows as well. Looking at the Advance Decline Dashboard, we can see solid gains in all of the lines except Energy and Basic Materials, which even Materials is making some headway now when I zoom in. Energy is not there yet. Don’t forget in last week’s report, Energy and Basic Materials accounted for less than 6% of the $SPY at this point, so if all the others are improving, we are likely to continue to see strong markets. We have discussed the breadth progression in past reports that starts with the shortest indicators firing followed by the intermediate and then finally the longer term readings will join it. The Advance Decline Line is in our longer term bucket and is now reacting well here as this move becomes more than just a bounce off the lows. It is not just the Advance Decline Lines. Looking at the rest of the sector breadth picture, they are all acting pretty well off the lows. From Moving Average readings to the McClellan Chart, breadth is improving with the markets after taking the first half of the year off. The final piece will come if/when the NHNL differentials start popping off new highs in earnest. This being the longest measurement is usually the last to turn, but the broad improvement from the rest of the breadth indicators is the progression we need to get there.
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: This week was a win for the bulls in my book with Small caps taking the lead and running their own race while the larger names took a rest without breaking down. It seems the buyers on weakness are back and not waiting too long to start nibbling. Whatever the reason, these markets are being accumulated as we move into December. I believe this can continue as portfolio managers are lagging after getting too defensive in the fall and need to play catch up. I think this will keep the dip more shallow in the coming weeks as they struggle to get repositioned. Seasonality will provide support through the end of the year, but I do expect some give and take as tax selling and other end of the tactics are employed. I still think a hard test of the highs before the end of the year (or in January latest) is very possible for all indexes, including the $IWM. How we act during those tests will likely write the next chapter of this book. Don’t expect a tragedy until we find a better antagonist than the ones we have now. “Because the trend is long in the tooth” or FEDDIE raising .25% are not likely to be the death of this relentless action. These are things that are known at this point and have probably been priced in by many. They may cause more volatility, but bear markets are driven by heavy selling and a lack of buyers. Neither of those are present right here right now. The September retest was their chance and it slipped away for now.
Have a great week!
G. Thomas Lackey Jr, CMT CFP® CFS
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