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Macro Relative Strength
It is never a top choice to have $UUP and $TLT as the top RS for the week. These two were also the top gainers along with $DBA which doesn’t really fit in this group. These were the performers this week just the same. The strength in the $UUP kept the pressure on all the other commodities. After leading last week, $USO gave it all back and then some. Then we turn to equities which have sunk down into the middle of the rankings. This is not an ideal Intermarket RS structure for strength and it keeps us cautious (not bearish) until we start to see improvement. The Equity Size & Style is where we continue to find a mixed, but still slightly encouraging set up. The Small cap lag is well known at this point which is often viewed in a bearish light; but I continue to point to the Growth over Value positioning that has persisted even now as the worries (and noise) mount. This still has me leaning corrective, and the end of the week action might have signaled a short term trade-able bottom without everyone running to value plays. Market Structure remains cautious, but not bearish as long as Growth continues to lead each size category. It is a good sign we haven’t seen more breakdown to this point, but don’t really get any tailwinds from seasonality until the latter half of the month so remain vigilant.
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.
From a pure breadth perspective, we ended the week about where we started it, but there are quite a few nuances that transpired in the middle. The first and probably most important is the expansion of the NHNL Differential into deeper negative readings than we have seen in a long time pulling the 30sma into negative territory giving us our 3rd sell signal on this indicator. This is red flag here on a longer term measure and has accompanied some precipitous drops in the past. That puts some questions on how much longer we have in this bull, but it is only one indicator. The Advance Decline Line continued down solidifying its lower low while price did the same. These lower lows are fractional for now and began to revert immediately after piercing. This can be a false breakdown, so the coming week should be pretty important on that note. Add the %>200sma holding just above 30%, and the long term is questionable at the moment. Next level in the Intermediate term which is dominated by the McClellan Summation has been going straight down for a few weeks and is now nearing the lows from November 2012 as this last leg higher began. The %>50sma dropped below 20% at month end as well signalling oversold but needs to get back over 30% for a signal there. The last time we saw these lows was the same inflection on November 2012. These suggest nearing an intermediate bottom or lull. They need to snap back and not camp down here. Finally, we get to the short term readings which are all flashing green. We got another 80% day this week which puts me about at my limit. Maybe one more, but anything beyond that is bearish in my book. So far, the markets have not reacted much to them until this week. The %>20sma readings dipped below 10% to end the month and moved back over 20% on Friday giving a buy signal here. Coupling it with the %>50sma and the potential for the signal to be a durable bottom increases. Divergences are certainly possible, but we should be close if the bull market is to remain in play. We also have the McClellan Oscillator and Breadth Thrust Indicator which have hit extremes 3 times in the last two weeks and shot higher Friday. Again, there is no divergence present which could happen, but it would likely be the last shot down if we see one. Longer term breadth took more damage this week, but the short term readings are solidly oversold hinting this bounce is worth a shot, and if we get ST divergences, it would be a blessing. I can’t rule out another shot down to form those divergences, but we are sufficiently oversold and set up for a trade-able bounce, if not a durable bottom.
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.
Advance Decline Line can still be clicked on which will take you to a page with the dashboards for the broad sectors like above as well as all the subsectors dashboards.
As I mentioned above, the Universe is sufficiently oversold on my breadth measures to support a stronger bounce and maybe more. That makes these charts even more important to look for the sectors you want to go searching in. The last two weeks have wreaked havoc on most sectors and left some downright washed out. Utilities, Energy, Basic Materials and Financials are pretty low at this point. It is worth noting that neither Energy nor Basic Materials saw the springboard effect on Friday. This has a good bit to do with the $UUP strength, but should be monitored going forward. I still think we are at a point where taking some low risk shots are worthwhile for nimble traders and some investors who practice good risk management. If you are concerned about individual company risk, take a look at the ETF Sector Page for ideas.
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. This week 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. So far, I agree with Mike (@SSTtrader). Busy at first, but do solve the alignment problem.
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).
The big relative strength mover for the week was Utilities, but Health Care continues to be the strength leader as it has been for a while. On a Subsector basis, I noticed Pipelines and MLP are making a move as well. Worth a look for income players.
Final Note: We went into the end of September with a good bit of fear in the air after a tough month especially in small caps. The breadth deterioration was broad and swift in many cases, but that has brought us into some extreme readings that can be seen as opportunities with pretty good risk reward against the recent lows. As always, this close to a potential bottom one needs to remain nimble as there are no guarantees we won’t take another shot down. Actually, that might be preferable if it can form divergences in those indicators. The problem is waiting for a divergence that never comes could leave you chasing. That is why I recommended dipping your toe back in last week and continuing that this week. Only the markets themselves can dictate when it is safe to start swimming again, but until then your risk management plan should keep you afloat.
Have a great week!
G. Thomas Lackey Jr, CMT CFP®
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