October 12, 2014 Strength In Numbers

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October 12, 2014 Strength In Numbers

12-23-2013 Cover Graphic

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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

10-10-2014 Intermarket ETF RS Rankings

Intermarket ETF on FINVIZ

10-10-2014 Equity Size & Style ETF RS Rankings

Size & Style on FINVIZ

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 Differential10-10-2014 Universe NHNL

The Advance Decline Line10-10-2014 Universe AdvDecLine

The McClellan Indicators10-10-2014 Universe McClellan

The Moving Average Breadth10-10-2014 Universe MA Breadth

Breadth Thrust Indicator10-10-2014 Universe BreadthThrust

Percent Days10-10-2014 Universe 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 Line10-10-2014 BSec AdvDec Line Dashboard

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 Breadth10-10-2014 BSec MA Breadth Dashboard

Broad Sector McClellan Charts10-10-2014 BSec McClellan Dashboard

Broad Sector Breadth Thrust10-10-2014 BSec Breath Thrust Dashboard

The New High – New Low Differential10-10-2014 BSec NHNL Dashboard

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.

10-10-2014 Broad Sector CI Relative Strength 10-10-2014 Subsector CI Relative Strength

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.

10-10-2014 Sector Proxy ETF RS Rankings 10-10-2014 Sector Proxy EW ETF RS Rankings

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 Rankings10-10-2014 Top 30 Sector ETF RS Rankings

Top 30 Sector ETF RS Rankings on FINVIZ

Bottom 30 Sector ETF RS Rankings10-10-2014 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)

The information set forth herein was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy.  Neither the information, nor any opinion expressed, constitutes a solicitation by us of the purchase or sale of any securities or commodities.  There is no guarantee that the views expressed in this communication will become reality.  Investing in the stock or bond markets involves risk and potential loss of principal.  Investment strategies should be thoroughly vetted and discussed with a financial advisor prior to implementing.

About Author


is a Chartered Market Technician (CMT) and Certified Financial Planner (CFPr) in Greensboro Georgia (Outside Atlanta). Founding partner of Barber Lackey Financial Group, LLC, a Registered Investment Advisor. However, this blog is not affiliated with BLFG and does not make recommendations to buy sell or hold any securities.