October 4, 2014 Strength In Numbers

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October 4, 2014 Strength In Numbers

12-23-2013 Cover Graphic

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For more background on this report, the Strength In Numbers ppoint further explains what I am building here.  Previous reports can be read here.

Macro Relative Strength

10-3-2014 Intermarket ETF RS Rankings

Intermarket ETF on FINVIZ

10-3-2014 Equity Size & Style ETF RS Rankings

Size & Style on FINVIZ

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 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 Differential10-3-2014 Universe NHNL

The Advance Decline Line10-3-2014 Universe AdvDecLine

The McClellan Indicators10-3-2014 Universe McClellan

The Moving Average Breadth10-3-2014 Universe MA Breadth

Breadth Thrust Indicator10-3-2014 Universe BreadthThrust

Percent Days10-3-2014 Universe Percent Days

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.

Broad Sector Advance Decline Line10-3-2014 BSec AdvDec Line Dashboard

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.

Broad Sector Moving Average Breadth10-3-2014 BSec MA Breadth Dashboard

Broad Sector McClellan Charts10-3-2014 BSec McClellan Dashboard

Broad Sector Breadth Thrust10-3-2014 BSec Breath Thrust Dashboard

The New High – New Low Differential10-3-2014 BSec NHNL Dashboard

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.

10-3-2014 Broad Sector CI Relative Strength 10-3-2014 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.

10-3-2014 Sector Proxy ETF RS Rankings 10-3-2014 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 Rankings10-3-2014 Top 30 Sector ETF RS Rankings

Top 30 Sector ETF RS Rankings on FINVIZ

Bottom 30 Sector ETF RS Rankings10-3-2014 Bottom 30 Sector ETF RS Rankings

Bottom 30 Sector ETF RS Rankings on FINVIZ

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®

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.