November 9, 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
We return this week with equities at the top, commodities at the bottom, and the Dollar and bonds stuck in the middle. Make no mistake, the $UUP move has been impressive and impactful, but it just isn’t going to move like equities when they get lit. $QQQ moved to the top spot while $IWM moved back down to 4th. This is an interesting quirk in my RS calculations. Notice $IWM is the clear leader over the last month, but not in the 3 month time period which is weighing it down at the moment even after being in the top spot last week. Either way, all of our equity readings (except $IWO) were positive for the week, but somewhat lackluster overall. The $SPY and $DIA moved well, but the majority of the markets moved more sideways in flag like patterns. After a strong run off the lows, a big chunk of the market ran in place this week. So far, it looks like decent digestion, but could continue into this week and test resolve if the markets don’t make a strong charge out of the gate. Markets are not seriously overbought, so continuation is not out of the question.
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
The Universe continues to act well moving sideways most of the week while the breadth advances slowed, but didn’t turn down by any means. The NHNL differential readings tapered, but the 10 sma and 30 sma continued to gain ground. Just a little further and the 30 sma will be back above zero resetting the signal count. Short and intermediate term indicators paused with the exclusion of the McClellan Summation Index which hasn’t flinched since turning. A straight shot back to the highs is possible, very normal, so a little more pressure before we move higher could help build up the strength needed to break out. It is still going to take a little more strength to get the long term measures back in a strong position, so anything more than a pause here is not desirable. If we see the long term readings rolling back over on any near term weakness, it should have our attention.
The structure building from short term to long term is still intact, but slowed some this week. Keep a close eye on if the long term readings react to any short term weakness. If they do, it would bring back a little caution to the picture.
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 move off the lows was broad and strong bringing all sectors into to the mix in the short term, but it is when you start venturing out of the intermediate and long term readings you see the real separation. Many of the Advance Decline Lines are making new highs, but a quick jump to the %>200sma shows more room to improve in just as many sectors. The picture is still mixed, but that is what gives you the opportunity to target. Right now, with the major indexes in a spot where they may rest for a bit, commodity sectors might be a good place to look for some relative strength. The short term breadth readings in Basic Materials and Energy were hinting to this potential last week as they did perk up toward the end. This would allow for rotation while the broad market continues to digest the recent run.
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
With the markets running in place this week, there was not a huge relative strength standout. Real Estate looks like it finally might be ready for a rest, but it started first, so that is fine. It also looks like Industrials are back in vogue, but not making big waves; and the Basic Materials and Energy moves are nascent enough to not be registering on the Relative Strength lists so far. Best idea is to continue to focus on those who hold up the best during any sideways or pullback action, but with the broad participation we are seeing right now, there is strength to be found inside almost any sector you choose.
Final Note: I think it is safe to say this was/is more than just a bounce. Now that we are at or near new highs depending on the index you are looking at, it gets a little more difficult. Short term, I am fine with some pullback or more sideways, but if we have learned one thing over the last few years, it is markets can and will go further than most think it can. Right now, I am more concerned about structure. It has greatly improved over the last few weeks and has brought us back to a point where markets are innocent until proven guilty again. In this environment, we continue to take the opportunities we find and monitor how they and the markets act during weakness for clues of a change. Right now, we are on new high watch and expect turbulence along the way, but for now the the universe continues to build in both price and participation.
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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