October 26, 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
Of course, the week I don’t do a report catches the turn, but hopefully most of you follow me and saw the Breadth Composite Charts I posted over the last two weeks suggesting a change was afoot. Of course, the price and relative strength improvement is not as noticeable if we are only looking at the Intermarket list. This list still has $TLT and $UUP at the top which aren’t exactly equity friendly in most cases. But then just below that the $QQQ turned in a 6% week and jumped 7 slots in the ranking. All equities turned in a strong week moving them back up the RS ladder helping improve the list structure. The price action over the last two weeks has been impressive. A little sideways to down action would actually be healthy here, but there is no guarantee we will get it. V-bottoms are definitely in this year (as long as @Chicagosean is not the one wearing it). I am also encouraged when I look at the Size & Style list and see the Growth segments quickly moving back to the top and this time in all size categories. I am still surprised when I hear commentary about growth names not leading this year, yet most weeks this ranking list has told a very different story. Narratives are great, just make sure you understand (and agree with) how they are built before following them. Don’t mistake occasional leadership by defensive sectors as lack of growth leadership. They don’t have to be mutually exclusive. Intermarket Structure is improving quickly and Growth is back leading as we end October. After strong runs off the bottom, we could use some digestion. This is where we will get our next message from the markets. If we can get some digestion, it should produce some great setups heading into Thanksgiving. So far, the message does not look too scary for this Halloween week.
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 breadth picture has improved greatly since the last report, but even then I was suggesting we were more likely near a bottom than a top. The breadth had become so washed out on so many measurements, we were either right near the bottom or about to hit a trap door to the Netherworld. Market trips to the Netherworld don’t come often. Since those lows, the markets breadth has done exactly what we needed it to…so far. We still have some longer term caution flags flying in the NHNL Differential and the AdvDec Line. However, the NHNL did turn back and remain positive all week. This sent the 10sma running back higher toward zero. We need it and the 30sma to turn back positive to reset the count here. This is going to take some effort by the bulls to produce the new highs, but certainly not out of the question. The AdvDec Line has made a beeline off support, but it still has a good bit of work to do before seeing highs again. These are to be watched, but aren’t really as important near bottoms or potential bottoms.
At these times we look a lot closer at the McClellan Oscillator, Breadth Thrust Indicator and %>20sma for starters all of which hit washed out levels a few weeks ago and churned for about a week before launching. And, boy did these launch into strong thrusts off the lows. A great sign for risk appetite and also strong enough to then turn the McClellan Summation Index higher from well below zero. You can see on the chart previous occasions marked with green arrows. These have been very solid intermediate signals in this bull market so far, even when you take into account the few retests. Could this time be different? Sure, but why ignore a signal with such a good history? A better idea would be to take the signal and have a solid risk management plan.
From here we watch to see how the intermediate measures improve over the coming weeks. If they do continue higher, then we will be looking for the necessary improvement in the longer term measures. It is a process of improvement from market lows, not an event; but so far, it is going well. We got the bounce and then some, now we look for digestion while the breadth continues to gradually improve. The Summation Index and %>50sma will be in focus for the next couple of weeks and if we see these firm up more, we would expect the longer term indicators to kick back in.
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
Sectors also saw nice surges off the breadth lows to accompany price the last two weeks. It was enough strength to turn all of the sector Summation Indexes higher this week. The breadth dashboards above show the recent breadth advantage in Utilities, Real Estate, Consumer Staples and, surprising to many, Financials. The first three are more defensive sectors, but I would argue that it is very normal for them to be leading after corrective action. The flight to safety should be expected. The real tell will be if they keep or lose that breadth strength as the markets improve. If they keep the lead, I would be more cautious on the overall markets, but enjoy those particular trends. If the breadth in these sectors wane or at least blend in the crowd better as the markets recover, it would be a good sign of risk appetite returning. Either way, breadth leading sectors are always worth concentrating on.
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
Health Care continues to be king with Biotechnology way out in front. I feel for those who continually try and short this monster trend. Eventually, those who survive will be right, but by then getting back to even might be the only goal. Other defensives are still at the top here with Real Estate, Utilities and Consumer Staples. Same as above, a trend is a trend, so use it while it lasts, but also watch for these areas to take a back seat if the buyers continue to chase back in. A great place to spend some time each week is the Sector ETF Page as it can really give you a feel for where the attention is going right now. When we are forging potential bottoms this differentiation can be even more valuable.
Final Note: As we discussed here in recent weeks the breadth washout we saw had all the signs of an intermediate or even possibly long term bottom. It has been my view for months that the broader markets and my universe have been in a sideways move (corrective action) almost all of 2014. The rub for many was the $SPY and $QQQ had not even dropped enough to signal a correction and the $IWM looked like it was breaking down which had many questioning the end of the bull. This is nothing new; most corrections play out in a manner that scare the very people that are looking for it the most. To be fair, anytime breadth gets a washed out as much as it did, it could either be a bottom or the start of a bigger downturn. The problem comes with playing for the bigger downturn since they only come around about once or twice a decade. Therefore, the better play is usually to pick spots that have pulled back hard and are very near support to give a lopsided risk/reward. That way, if this is the big one, you only take a small loss; but if not, you have some great entries for the next move higher. It is harder than it seems, but more often than not the numbers work out in your favor and the world doesn’t end. I would be ready for some back and fill this week, but not convinced it will be enough to take advantage of for any but the shortest time frame traders. For the rest, look for new set ups and opportunities in any digestion we see this week in case we have put in that intermediate bottom.
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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