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Macro Relative Strength
Interestingly, $USO (Oil) was the top performer last week as it started to retrace some of it’s swift fall, but that is about all that followed last week’s commentary. That is not too unusual as the markets usually do what they want. This week the $UUP (Dollar) had no interest in pulling back at all. Instead, $UUP gained another 1% which is no small matter in currency land. I still think this is getting stretched, and will calm down soon if not reverse. Those $USO gains might be a hint it is coming sooner than later, but until we see it, don’t get too far in front of yourself. $TLT was another big gainer this week showing more caution coming out as the equity world had another rough week. It is hard to say it was all bad though with most of the indexes hanging in the top half of the list. $IWM is continuing to live up to its position as the woeful laggard this year, but this week all equities got questioned a bit more. The Size & Style really paints the picture as it is in almost perfect alignment from large to small and secondarily sorted from Growth down to Value. Caution is still warranted, but getting to levels that might see some retracement; and it is in those retracements we get most of our pertinent information. The smaller you get, the closer to a major breakdown you see in the charts, but none have taken the final blow yet. Don’t forget in all the hoopla that those breakdown levels can also provide support, and with the oversold nature we are seeing, I would give that a chance to work before throwing in the towel.
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.
Plenty of weak breadth action to talk about again this week, but almost getting panicky in the short term, so we will have to take things in stages. Starting on the long term end, the NHNL Differential ended the week negative and the 10sma is solidly submerged as well. I zoomed out so you could see the last time we had negatives like this back in 2011. However, the 30sma won’t relent and is keeping us from getting that 3rd signal that turns this flag bright red from orange. The Advance Decline line also made its 1st new low in what seems like forever, but so far only by a fraction. It’s official, but also a bit suspect in the short term (not a short term indicator). If it recovers quickly, I will watch it, but lower its value. The last long term is the %>200sma which is at the 40% level which often marks reversal areas in bull markets. Intermediate term indicators include the %>50sma which is currently oversold below the 20% level, but this segment is really ruled by the McClellan Summation Index which is still pointing firmly down. The Summation has come right back to the August lows. Turns in this indicator have been great signals in this move higher, so if we get one I will trust it and count on my risk management plan just in case. One of the reasons I am looking for a signal is the combination of short term indicator readings we currently have. The McClellan Oscillator now has 2 pivots from an oversold extreme in one week. Same with the Breadth Thrust Indicator. Put those two together with the oversold readings on the %>20sma and you have a recipe for a bottom when in a bull market which we still are for now. Of course, everyone likes a cherry on top, so let’s throw an 80% and then a 90% down day in the week. Short term, the table is set for a bull market bottom sooner than later. Sure there can be another shot down, but with these short term readings, I expect the risk is to the upside over the short term. While still uncomfortable with the recent deterioration in the markets, the breadth picture above is telling us to pick our spots in the short term and start taking opportunities that fit our trading style. Then, as we see the markets put in a real bounce, we can look for evidence of broad participation and potential staying power.
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.
One of the main advantages to looking at the sector breadth separate from the broad figures is to help pick spots to dip a toe back in when we get oversold like now. There are quite a few sectors hitting some decent extremes here and now. I will be looking at strength in the sectors that have been most washed out for opportunities. If there is not huge differentiation or you don’t have the time or mechanism to go deeper, there is nothing wrong with building your plan around an ETF in the space. The Sector ETF page can help there if you are so inclined. I reiterate, we are nearing a point taking some low risk shots are worthwhile for nimble traders and some investors who practice good risk management.
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 Sector relative strength is always showing some rotation and movement, but it has been fairly calm in recent weeks. The one change I would draw attention to is the loss of rank in the price weighted Technology custom index while the ETFs in the space remain relatively strong. Sometime these divergences are worth paying attention to, but more often than not it is a nod to the large cap players in the space which have definitely been the winners in tech. Overall, to find big RS movers, you have to drop down to the subsector or ETF level. As I mentioned above, a good strategy usually is combining the oversold sector breadth readings with strong names or ETFs in the space.
Final Note: We did accelerate down a bit this week, but right into a key support level for small caps while they are sitting in a pretty oversold state. It can get worse, but don’t mistake oversold for overbought. They are not the same animal as oversold states can persist a while, but they hardly ever linger like overbought readings. The weight of the evidence from combining relative strength, breadth and chart work is telling me we should be starting to pick up exposure here soon if not already. That will depend on your style and trade plan, but the table is set for some retracement here. If you add in the seasonality in front of us, a bounce that gains any traction could send us off to the races. Remember, my price weighted index and breadth have shown an internal consolidation most of the year. If that assessment is on track, we should be ending it sooner than later. Consolidations usually last between 1/3 to 1/2 the time of the previous move and we are about to 1/2 the time of the recent expansion now. There is room into mid October, so remain vigilant with your risk management, but don’t panic here. Your list should already be made, so work your plan and take the opportunities presented.
Have a great week!
G. Thomas Lackey Jr, CMT CFP®
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