September 21, 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.
Some changes throughout the report based on my review of how people are using it. Let me know if there are pages missing you utilize weekly.
Macro Relative Strength
Unsettled is the best way I can frame the markets. Not bad, not good, just unsettled which means we could go either way from this spot. If $IWM is the tell, we will head down for a bit. Many smart traders went into the weekend with that leaning. Other than Small Caps, the rest of equities are holding near the top of the Intermarket RS list. That is still a positive. The $UUP strength seems extended, but is keeping the commodity space under pressure. I say that, but $USO eked out a gain this week and might be worth watching. $UUP is due for some rest which has the potential to spur some rotation back into commodities and maybe even commodity stocks. It is worth noting that the above scenario could play out even in the face of further broad market correction. Commodities correlations often wander from the rest of the equity world. I am not saying go out and blindly buy into the current weakness, but I would be watching for some mean reversion at any time. Slightly cautious entering the week, but that is more a feeling than in the data. So far small caps are the only group losing RS and more vulnerable. The rest of equities are holding up fine. I want to pay more attention to the $UUP and commodity space for some mean reversion soon.
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 Universe breadth is giving a little more credence to the short term cautious note above. The NHNL Differential ended with a -47 and that was enough to pull the 10sma below zero. That is 2 of the 3 signals in this indicator expressing caution. The AD Line is conquering as it continues to lag badly and the %>50sma can’t stay over 50%. All of these are individual yellow flags. No outright red ones yet, but it looks like we could have one more push down before we see if we can find extremes to build off of. Even the McClellan Summation Index continues to fall; but would have to reverse this week to pull off a save. This all adds up to a tighten up and wait and see view. Want me to pile on a little more? Seasonality is also pretty bad this week. So the weight of the evidence is to be cautious this week, but we do not have the long term sell signals needed yet to get really worried. We are definitely closer than we have been in a while. Breadth Indicators continue to weaken. The odd part is how slowly it is happening. We are not at extremes yet, so we could have more work to do on the downside if the bears are able to push. That is still a big IF in this trend.
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
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 Breadth
The New High – New Low Differential
The sector world is also showing a good bit of weakness in the short term indicators, but no serious extremes yet. If you couple this with the mixed messages on the intermediate and longer term indicators throughout the sectors, it still has a bit of a rotational feel to it. It might be a weaker version due to the time of year we are in, but doesn’t currently feel like a mass exodus from any sectors. There are some Subsectors below like Precious Metals providing a big drag inside sectors, but as a whole things are not coming unraveled yet.
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 Rankings on FINVIZ
Bottom 30 Sector ETF RS Rankings
Bottom 30 Sector ETF RS Rankings on FINVIZ
Final Note: The current consolidation has been going long enough that it should be near the end or will accelerate down a bit. That plus the seasonality has many cautious, but I would keep my eye open both ways. Last week seemed to wear on many, but it was OPEX week, what do you expect? This week should give some resolution either way. I am leaning a bit cautious going in, but it is also hard to get too bearish with Financials, Technology and Consumer Discretionary near the top of the Relative Strength rankings. I will keep an eye on those, but also be concentrating on some potential mean reversion opportunities in the commodity space. We also need to be vigilant from a longer term view to make sure further weakness doesn’t start showing up in those readings. If that were to happen it would be much more concerning.
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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