Strength In Numbers for December 29, 2013
Welcome back for week two of Strength In Numbers. If this is the first time you are seeing this project or my work, I explain my vision in Strength In Numbers ppoint. Also, if you missed last week’s pdf version, you can get it here 20131220 Strength In Numbers BM. I spent a good amount of time explaining some of the breadth measures. I will embark on a series starting early next quarter to more thoroughly cover each indicator and its uses. For now though, let’s explore another format for the report this week making it web-based allowing for more visual inspection of the charts and lists included. This will allow the report to be more concise and those who want to dig deeper should have plenty to explore in the links provided.
If you just want the highlights, check the Executive Summary.
This week we will start with a look at the Intermarket Structure. Even though this is about equities, I think knowing where we stand overall is worth starting with.
The relative strength view of the markets is something I have used for many years. At this point we are in an optimal structure with Equities on top, Dollar & Oil in the middle, and finally Treasury Bonds & Precious Metals on bottom. This shows the strength of our current circumstances, but not how long it might last from here which is why we turn to the Breadth views.
Universe Breadth
Universe of 3,070+ stocks from 10 custom broad sectors and 49 subsectors. Universe contains 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 remained very healthy this week albeit dropping off the surge of last week. That does not bother me as long as it stays well above zero. It would be nice if we could get some more expansion here, but hard to argue too much with these numbers.
The Advance Decline Line surged to new highs this week as suggested in last week’s report. All the talk about it lagging is premature in a more mature stage of the rally as we are in. This does add support to the current move and suggests we are not in the process of any major topping patterns at the moment.
The McClellan Summation triggered both signals this week that were mentioned last week. A cross of the moving average signal line and a cross of zero puts this solidly back in gear and puts a little more evidence behind the running correction theory. The McClellan Oscillator gave its preliminary bottoming signal two weeks ago and then crossed up through zero last week. This week it is starting to get hot short term, but not a measurable extreme. Even if it does top here, with the look of the Summation index, I would be looking for another oscillator pivot at a non-extreme level to buy.
The Moving Average Breadth readings continued to build throughout the week and nearing the top lines on each. That is not a bad thing in my book as they can stay in these upper regions for a while. One thing it does do is negate a good many of the divergences we have seen here since summer.
The Breadth Thrust Indicator is also nearing an extreme area, but this indicator is much better for bottoms. At tops, the indicator diverges multiple times in many cases, so the extreme highs are not a sell signal. If you must use this indicator for sell signals, then use wide divergences instead.
Percent Days is our final look to see if we have any measurable extremes. Nope, not this week, but I think it is still worth us keeping an eye on.
Summary: After seeing last week start to improve the breadth picture, this week that picture solidified itself well. It seems the Holiday week was not enough to keep the pent up energy from getting loose in many areas of the markets. Once we saw participation begin to increase, it snowballed. The markets will still have up and down days, but for now the breadth suggests the equities bid is still solid.
Style & Size Relative Strength Rankings
From a broad perspective we look at the RS rankings for the largest ETFs in each category.
Here we see an interesting mix with Large Growth and Mega Blend in the top spots. This plays with the large institutions putting money in large companies into end of the year. They can get a lot invested without making as big of waves. One might say it was because the market was narrowing, but the breadth work above suggests otherwise.
Broad Sector Breadth
This view 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; if you click on each respective title or the Dashboard for that indicator, it will take you to a page specifically for those sector breadth charts.
Broad Sector Advance Decline Lines continue to improve pretty much across the board. Some showing much more dramatic moves than others. Consumer Discretionary, Consumer Staples, Financials, Health Care, Industrials and Technology advance decline lines all made new highs this week, while areas like Basic Materials, Energy and especially Real Estate still have room to play catch up if they want to. Utilities are also trying to improve, but seem to have some macro headwinds that can hold them back, but hey, I guess you could say the same about Real Estate and it has been on my bottoming radar recently. The AD Line gives us a start, but there is much more information as we move through the other indicators.
Broad Sector Moving Average Breadth is something that I have posted for a while now as I believe it gives the best multi-timeframe view of each sector in one chart. The Dashboard below looks a little intimidating at first, but once you get used to it, there is a wealth of information here. Also, don’t forget if you click on it you will go to a page with each individual sector chart.
The Broad Sector McClellan Indicators in my view give the most stark message. As I mentioned last week, I believe one possible scenario was that we had multiple small sector corrections from May until present that basically caused the overall markets to experience a “running” correction. If so, the McClellan Summation Indexes for the Broad Sectors are telling us the overall correction may have run its course.
Seeing all of the sectors Summation Indexes making the cross higher this week from reasonable levels with very few seeing highs since this Summer could be the start of something bigger just when everyone is looking for a top.
Broad Sector Breadth Thrust and New High – New Low Differentials are also suggesting a market that is in a strong trend and money continues to rotate around the within the markets. Rotation is great as long as the money does not begin leaving altogether. With the short term indicators getting up there, a slowing or minor reversal is certainly worth watching for, but in my experience a major reversal or top does not usually come with data like this.
Sector Relative Strength Rankings
First, I look at the Custom Indexes and see what they are telling us on a price weighted basis.
Then, I look at an ETF Broad Sector Proxy of Vanguard ETFs for confirmation and tradable ideas.
Not quite the same due to the capitalization weighting of the ETFs (I also look at a basket of equal weighted ETFs, but not different enough to post)
Since I am not publishing the Sector Select version of this report yet, below is the Subsector RS Rankings for the Universe.
This shows digging even deeper we are not seeing a lot of big changes recently in our leadership.
All in all we have a strong marketplace with many different options for investors. Maybe too many in the very short term, but outside of that things look good.
Sector Drilldown
After concentrating on market strength with Technology last week, we are going to take a closer look at a sector that has been moving more or less sideways for quite a few years. Basic Materials just hasn’t been able to get any traction.
The Sector and Subsector breakdown from the powerpoint pdf at the top shows we have 192 stocks within 3 Subsectors. The RS rankings for the Basic Materials Subsectors shows a distinct difference in strength.
Until recently, it was Chemicals that dominated the top spot in the Basic Materials sector. However, this shows that Industrial Metals and Mining is taking over as of late. Of course, there still is the red headed stepchildren that are the Precious Metal stocks, but even that may change some if the Industrial Metals get enough lift. Let’s look at the Breadth charts for the sector.
The Advance Decline Line has just started to turn up and is currently testing a trend line after a long decline. It is interesting too since you can see the price weighted index has moved mostly sideways since mid 2011 when it saw a massive failure of support that has turned to resistance twice already. If participation in the move out of this flag can pick up enough, it might give enough strength to push through that resistance this time.
One thing to notice is that just before the flag bottomed this sector fired a 90% down day signalling the sellers could be getting exhausted and this time it did just that. The next day marked the bottom before this current surge. There were other signs that downside momentum was just not there on the recent drops.
The Breadth Thrust Indicator tells that story. The last extreme low we saw in this indicator was in late June. Since that time all of the subsequent pivot lows in the indicator have failed to reach an extreme showing buyers not giving a lot of ground as they accumulate.
The McClellan Oscillator is telling a similar story with the non-extreme pivot lows. Now nearing highs that give some short term caution, but if a dip does ensue, I will be watching closely. During all this The McClellan Summation Index has turned up and is starting to run higher.
Finally the Moving Average Breadth Reading are also showing some improvement on the longer term measures after pretty much sitting out the rally over the last year. This could be one of the most important to watch. Continued improvement in the percent above the 200sma will set up buying opportunities at pivot lows in the shorter term measures. I suspect we will be able to play off this set up a few times during 2014. This is a sector that has been churning while most others have been running and a look at the subsectors reveals that two of the three are showing good signs of strength. I have posted the subsector breadth charts at the following links:
Looking at these I like the Industrial Metals & Mining the best for emerging movers and Chemicals for continuation moves that can smooth out some of the bottoming action in the first. Precious Metals are just getting so bad they may be good soon, but only likely to come back in favor until they are no longer extremely oversold and undervalued. After that, they will likely continue to frustrate as that is their place in the universe it seems.
So how does this pan out when we look at the Basic Materials ETF RS rankings?
This pretty much solidifies what we are seeing above. This can give you a start if you like structured products. If you would prefer a list of individual securities, here are the top 20 for the Broad Sector.
For the long lists ranked by broad sector and subsectors, go here.
That should give you a good place to start. I am still not solid on my format for a watchlist, but it is coming sooner than later.
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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