November 30, 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 markets have decided to mix things up a little as you can see in both of the ranking lists above. On the Intermarket list, equities continue to hold in the top half for the most part, but also continue to be infiltrated by $UUP and $TLT as well as other bonds. Commodities once again took the brunt this week, but what’s new. I have so far wrongfully expected commodities to improve, but it seems Crude oil ($USO) had not priced in the OPEC news and took us down another leg to end the week. There was a lot of support broken, so it is guilty until proven innocent. The only positive would be if we could regain some of the support quickly, there might be short term reprieve after such a pummeling, but not sure how much to expect. My bigger concern is how it affects equities which so far outside of the commodity stocks has been a positive, but will that remain after Friday’s action? The late day sell off in $IWM was alarming since small cap underperformance has resurfaced in recent weeks. It basically closed flat for the week and Friday was a very low participation half day, so we will have to see how things react early this week to get any decent read. Basically, we need follow through before making any big decisions. Overall, the rankings are favoring larger companies and growth names, but that is pretty much the M.O. for most of the year.
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
After breaking out of the flag and holding from Friday to Wednesday, the markets went into the Thanksgiving holiday with a decent posture, but something changed towards the end of the day on Friday that took the market breadth and small caps in general to the cleaners before the market close. It was not pretty at all and brought us right back to the flag breakout zone from the previous week; but it is also hard to read too much into it until we see if we get some confirmation this week. If it keeps falling, we will negate the breakout and potentially see a quick move back near the flag bottom. The short term breadth measures rolled back over to end the week, but remain above the recent lows. So far, the intermediate indicators are still pointing up and the longer term ones are not reacting much. However, the NHNL Differential action on Friday is worth noting. The new lows had a big spike due to the energy pummeling. Of the 145 new lows in the Universe, 102 came from Energy alone which only has about 260 names in the sector representing almost 40% making lows. This certainly skewed the data for the day, but with a positive Differential, it shows there is plenty of strength elsewhere offsetting the weakness here for now. The overall breadth picture remains on solid footing for now even with the weakness on Friday. Short term measures flexed, but the intermediate and long term are still holding or improving as we move into December. The biggest issue would be if commodity weakness stopped being a broad market benefit and becomes an anchor. So far, that is not what we are seeing.
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
For the most part, the sector world performed well again this week, but my thesis of commodity sectors playing catch up from the last couple of weeks took a big blow in the holiday action. The consolidations I was seeing in Energy turned out to be bear flags that broke to end the week on the OPEC news. I already spoke about some of the negative breadth readings in Energy above. None of it looks very good right now. The one interesting (potential positive) thing I would point to is the action this week in the McClellan Summation Index. I really would have expected it to have taken a hit in this week’s action, but it didn’t really. So far, it is just worth noting, but if we were to see some bottom feeding in Energy soon, it might set up a solid divergence on the Summation Index which don’t come around very often. This is just one scenario, and probably the most positive that can be seen on the charts. The break Friday caused some pretty big damage, so the sector needs to prove some worth very quickly to keep any interest. Okay, maybe one more positive is how negative the sentiment picture ended the week in this sector. It is work to find any positives out there. Other sectors that do deserve some accolades for their action are Consumer Discretionary, Consumer Staples, Technology, Industrials and Financials. Really, most other sectors are moving along just fine. Financials did show some short term weakness at the end of week too, but again I discount the importance on the half day with low participation. Another sector I continue to like the action is Real Estate which has been a leader all year and continues to act well.
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
Health Care and Consumers seem to have taken over the top of the RS off the recent lows. Real Estate made a decent jump back up in the rankings this week on the strong action we mentioned in the breadth section. Once again, Biotechnology had a great week for Health Care, but other of its subsectors also showed up. At the same time, Retail, Leisure, Media and Housing all propelled Consumer Discretionary. We all know Energy and Basic Materials took the hardest hits, but Utilities also continues to lose relative strength as they just can’t keep up when the market’s mood is on the positive side. However, even if they lose relative strength, that does not mean there won’t be opportunities in the sector. The breadth structure in Utilities still looks interesting if it finds a floor here, but be aware that much more weakness in the sector will start to weigh on the longer term indicators.
Final Note: The broader markets action and breadth continue to look constructive. The one caveat there is I want to see how things shake out early this week after the end of day shellacking of small caps and $IWM on Friday. It may be nothing, but it still has my attention in the very short term. If the recent daily flag breakout does fail, the first support I will be watching is the bottom of the flag in my charts above. To be clear, right now even if we do see follow through on Friday’s weakness, the breadth structure being pretty solid would add to the chance it can hold (if it doesn’t hold, then reassess quickly) and we still see Santa this year. If it does end up being nothing and the weakness doesn’t confirm, then we should continue to favor slow grind higher into the previous highs for the Universe and on breakout watch for small caps. There is no reason to expect the worse here, but this is a scenario that is worth watching as we start December.
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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