September 14, 2014 Strength In Numbers
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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
Click on either table for a deeper view including the Top and Bottom 20 ranked Broad Equity ETF and FINVIZ links.
Interesting week in the Intermarket world with $UUP being the only component that was green. Equities held up well comparing to bonds and commodities keeping them all in the top half of the list. Commodities continue to take it on the chin with $UUP acting this way. If there was a surprise this week, for many, I expect it was the poor performance by bonds. All in all, I still consider it mostly chop. Commodities are a bit more, but are coming into areas they might see some support at the same time $UUP is pretty overbought short term. Some back fill in both those spaces should be watched for. Equities are still consolidating and a look at the second table shows us Growth is still hanging in there. I would be more worried if value was dominating, but instead those names lost the most this week. We may have a little more to go, but I am still in the digestion camp until more evidence for something worse shows up. And by evidence, I don’t mean top callers. Still consolidating on the equity front, but I wouldn’t rule out a sharp shot a little further down to keep people on their toes. Not much evidence for much more at this point. If bears don’t take that shot early week, I think we can test the highs again this month.
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
This was not really a week for the bulls when it comes to breadth, but how much can you expect while we consolidate? I do believe we are consolidating, but some of the breadth indicators should be watched closely here. If we don’t start moving higher here soon, there are a few indicators that will rollover at less than desirable places. The first to catch my attention is the McClellan Summation index which crossed this week and is now threatening the flatline. A quick break and recover of zero would be tolerable, but any more it would worry me from such a low peak. The %>50sma reading is giving a similar message. A peak near the midline is not what you want to see. These are intermediate measures that are stagnating too early in this run especially since price is just now testing the highs. If you put that with the NHNL Differential going negative a couple of times this week, we should be watching closer. Not enough yet to panic or turn bearish, but a closer eye won’t hurt anyone. Breadth Indicators are weakening to a point of attention, but not enough yet to shift our view. The time of year could also be playing a role in the weakness, we just want to make sure it doesn’t get out of hand.
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. For the first three indicators below, if you click on each respective title or the Dashboard, it will take you to a page specifically for those sector breadth charts. I did not include pages for the Breadth Thrust or NHNL.
Broad Sector Advance Decline Line
Also, check out this subsector view I created to dig a little deeper into where participation is moving to and from.
Broad Sector Moving Average Breadth
The New High – New Low Differential
This week brought more separation under the hood. Most are holding their own, but a few are nearing short term breadth extremes pretty quickly. Energy and Real Estate both hit the first extreme on the Breadth Thrust Indicator and are getting close on the McClellan Oscillators. Right behind them are Utilities and Basic Materials. Not too big a surprise with the commodity weakness, but if those are nearing support it might be worth looking for pivots this week. Financials are on the other side of this as they are improving relatively in recent weeks. It is looking like Financials might be ready to lead the next leg higher if that is the path the markets end up on. So I would be watching Financials for continued strength and Real Estate for a pullback play. Short term breadth in Real Estate really took a dive to extremes this week while the longer term measures are not looking as sickly. A pivot from here could retrace quickly, but needs tight risk management to stay out of a situation like we saw in 2013. Unfortunately, if the Interest Rate meme comes back, the weakness in Real Estate could last longer.
Sector Relative Strength Rankings
First, I look at the Custom Indexes and see what they are telling us on a price weighted basis. Click on either chart for a deeper view.
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 this week).
Top 30 Sector ETF RS RankingsTop 30 Sector ETF RS Rankings on FINVIZ
Bottom 30 Sector ETF RS RankingsBottom 30 Sector ETF RS Rankings on FINVIZ
Final Note: The current action still looks like digestion to me, but is starting to take a little more of a toll on the breadth measures. Some of that is attributed to time we have been moving sideways, but we can’t rule out more weakness here either. So far though, it doesn’t look like anything major on the longer term measures which is why I favor a short and sharp move down if we get one. However, that could change if we get the historically weak end of September and start of October. The key will be how much damage is done internally. For now this is just speculation, but we should have a sharper eye and make sure we stay tight. Many just sit out action like this which is fine too. It all depends on your trading style and trade plan for each opportunity.
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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