October 12, 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
Going into last week I was a little cautious, but also noted that it looked like we were closer to a short term bottom. That couldn’t have been more wrong. We did get one good day that looked promising only to be completely thwarted the next day. The bears kept control and finally moved both of our above lists into a more bearish structure. We can’t know how long we will stay here because much of the data below shows we are getting pretty washed out short term, but as of today these RS lists don’t paint a great picture. At the top in the Intermarket ranking list, all of the equity proxies are now in the bottom half of the rankings while $TLT and $UUP sit on top. This week was a sign of outright fear sinking into the markets. The way I see it is fear is an opportunity as long as it is an event driven emotion. It becomes a bigger problem for investors and the markets when it sinks in as a mindset. This week even took down the growth which has been holding up the best and one big reason I was remaining optimistic. Again, this can be a final washout and rebound quickly, but until we see it, the current structure is worrisome. Growth as the final pillar of strength got taken out this week and Equities slid further on both absolute and relative strength. Increased caution until we start seeing some improvement.
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
As we can see above, the breadth picture continued to deteriorate this week taking a fast move lower with the markets. The NHNL Differential was a red flag last week and remained so this week. During the week it looked like we had a couple of chances to improve things, but the bears pressed the gas into Thursday, and Friday slammed the long and intermediate readings. These are all still flying big warning flags and suggest things are much more suspect now and short term oversold bounces have to prove themselves before they are trusted. We will get a bounce sometime and the short term indicators are aligned and ready. Most of the short term measures are not only solidly oversold, but all are now diverging which is what we want to see. The short term breadth extremes and accompanying divergences are another piece of the puzzle that suggest a bounce is getting closer, but we have to wait until price action confirms. Once it does finally bounce, I would say bounces are guilty until proven innocent for now with the long and intermediate term damage we have seen.
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
Again here, we see oversold can get more oversold, but some differentiation always shows up in the sector world. While Energy is the current step child, Utilities, Consumer Staples and even Real Estate this week are starting to show improving breadth during this rout. Leaning toward those that held up the best during a downturn such as this can be a great strategy, but I would also take a look at some of the most washed out sectors as well. Let’s look at an example. The Energy sector in my universe has 261 holdings and currently only 2 (0.8%) of them of those are above the 20sma, only 3 (1.2%) are above the 50sma, and only 32 names (12.35%) are above the 200sma. Now, there is no law that says these numbers can’t go to zero, but probability (and history) tell us we don’t see these types of numbers very often and, when we do, they don’t stay here for long periods of time. A strategy (and maybe some patience) is all that is needed to turn this into an opportunity.
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 world including the Top and Bottom 30 ranked Sector ETF and FINVIZ links (added below).
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
Here again we see Consumer Staples, Utilities and Real Estate are the standouts this week. No change from last week except Real Estate picking up the pace of its rebound.
Final Note: We were set up for some opportunity last week against the recent lows, and those lows were breached in a violent way. That action does raise more cause for concern, but actually strengthened the short term bounce set up by creating the short term breadth divergences we have been looking for. The big change this week is from seeing the bounce as a dip buying opportunity to watching it with a jaundiced eye. That doesn’t mean any bounce from here won’t be the ultimate bottom; just that the burden of proof has shifted to the bulls for the first time in a long while. Continue to do your homework and be ready when the buyers return. Take the set ups that fit your trading style, but this time don’t get excited or committed until those buyers prove they are firmly committed too.
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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