Tommy Lackey, March 1, 2020

Markets saw an abrupt change in character this week as the virus fear continued to grow. After price held strong in the early stages it looked as if buyers were shaking off the news, but stats started hitting the airwaves and closures followed, it hit the markets and liquidity hard and fast.  By the end of the week many bullish views were quite shaken if not outright broken.  FinTwit is full of different views and angles to look at these markets.  There is some great research and the internet can be a wealth of information if handled right, but definitely comes with a healthy dose of hyperbole sprinkled in.  Many claim to have the best indicator and the answer to what is next.  That is not me.  What I prefer to do is review some of the process I use to manage the tactical portfolios at RCA and see what that might bring to light.  All I can do is share what I see in hopes it can help in decision making we all will have to do in the coming weeks.  I am a firm believer in a weight of the evidence approach; just make sure you understand your evidence, and its limitations.

In managing our tactical portfolios that are mostly invested in ETF products, I go through a top down technical review that allows me to start from a macro view of the current Inter-market relationships and work my way down through the equity world to the industry level (and individual stock level on occasion) to aid in the decision making process.  It boils mostly down to 3 technical views I am comfortable with, each consisting of many different camera angles to snapshot.  Price charts, market breadth and relative strength are the 3 main technical areas I lean on for short, intermediate and longer term perspective.  I take other variables in, but I leave things like the fundamental views to those who know better like Joe.  When doing my regular analysis, I usually flip back and forth through the three different disciplines as I am zooming in, but in this post I will discuss each view in its own grouping.  Sorry for the length, but it is a lot of charts each with a short commentary.  Lets get started with Relative strength.

Relative Strength

One thing to remember about my relative strength is it comes from a shorter term view which can make it a bit more noisy, but also more responsive.  I use it from a more flow perspective as well as absolute strength.  Here we always start with the Intermarket relationships which tell us where the equity markets stand in the global financial picture.

As we can see equities are all in the bottom half with Oil and Copper which pretty much sums up the economically sensitive areas of the Inter-market picture.  With Bonds and Gold leading, it shows fear is winning the battle as the flight to safety surged early week.  It was notable though that $GLD and other Precious Metals couldn’t hold the gains in the second half of the week.  Not enough to lean on, but something to note.  Equities have lost the leadership they have enjoyed since early fall.  $TLT spent a good bit of time up with them which is not completely normal, but not as unusual as you might think.

Next I move down to just the equity markets and start with the Size and Style proxies I look at.  I use two different groups, one with very specific separation using mostly Vanguard ETFs and the other using more ETFs that have a longer history.

This is a good view to see that even after the damage we saw this week, Growth is still the clear leader and still tilted to the Mega Caps with Midcap growth remaining pretty steady.  I like seeing the Midcap Growth working from a more macro economic perspective as well. The biggest point though is value is not taking this moment to shine which I would expect if market participants were viewing this as a longer lasting event. 

Once we can see size and style leadership it is time to drop into the sector views, which again I look at in various configurations to glean different angles. 

First thing I would note here is that Technology had already started to slow some before this week started which has showed up in some of the recent breadth while Utilities had been unusually strong for a couple of months, but that does make some sense with the strong bid that was staying under $TLT and bonds.  That would also help explain why Real Estate is sticking up in the ranks.  Technology continues to be the growth story which doesn’t look to be changing.  The Equal weight picture does put Utilities on the top for a while now also pointing to the dominance of the Megacap Technology names, but the others are still pretty strong on a relative basis.

After a week like this we might expect to see more of a defensive tone in these rankings, but that didn’t show up.  If the above explanations hold for Bond proxies, having Technology, Consumer Discretionary, and Health Care more towards the top is a plus for the economic and market structure picture.

This goes down one more level to look inside each sector to see how the industry based ETFs are faring versus the rest of those in a particular sectors.   I review all, but have just put the Technology ETF RS snapshot below since it is more popular and has a good many different ways to play things.

It is definitely interesting to see that it is China Technology that is leading and had already moved to the top coming into this week.  Internet is back showing some RS leadership and Semiconductors which had already been correcting made a big RS gain for the week.  These types of separations can be seen in most sectors like in Financials, regional banks are terrible and broker dealers have held up much better.  In Health Care, Biotech and Pharma continue to lead.  In the Energy Sector, Solar has emerged as the leader and is staying that way.  In Consumer Discretionary, Home Builders had been a big leader until this week as it took a hit while Gaming and Online Retailers shined.  These cross currents can give their own insight into both sector health and economic positioning.  Now that we have moved through the relative strength world, let’s move next to the Breadth view.

Market and Sector Breadth

Market Breadth I try to share at least weekly using my own 3000+ stock only universe that is broken down into sectors and about 42 different industry groups keep component sizes measurable.  A 3 constituent sector does us no good from a breadth perspective.  Here we always start with longer term measures like the New High, New Low Differential below

The NHNL Differential has 3 signals, indicator, 10sma and 30sma.  Once they all move below zero, the markets have a decent track record of a longer and deeper move, sometimes accelerating as that 3rd signal crosses.  Right now the first two are negative just waiting for the 3rd to trigger.  There are some whipsaws here, so it doesn’t always follow through.  The Indicator itself showed a small victory Friday putting in less new lows than the day before with a lower closing price.  It was still a big week for the bears putting the longer term breadth indicator into jeopardy after a good bit of recent strength.

Advanced Decline line is another longer term measurement that was diverging ahead of the drop some, but is now dropping less than price when we compare the charts.  Note the blue horizontal line that I believe is a potential support zone.

Moving to the MA breadth chart is where it really is starting to get interesting, at least in the shorter term time frame.  %>20sma is down below 6% and the %>50sma is below 10%.  These aren’t the lowest levels I have ever seen, but at a level they don’t stay there long on the initial drop.  If this does turn into a longer term event, after a bounce attempt or two they could camp down here, but not usually on the first stab at it.

The McClellan Summation Index is back down to a normal pullback zone in uptrends near the 1000-1500 level.  The big question everyone would love the answer to is this a normal pullback or not.  Sure didn’t feel like it this week, but it did send the Oscillator to levels only seen a few other times and as I mentioned this week, usually it was very near a bottom, but maybe not THE bottom.  In 2018, it was both.  After a retest potential, more often than not in the past it has led up to a larger bottom near term even if a retest is necessary.  I can’t help but get excited when I see the oscillator that low, and it even crooked up on Friday. 

After 3 of 4 days this week being essentially 90% down days, Friday turned out to be a very normally distributed day on both volume and advance/decliners.  This came on a down day with very heavy volume which is a decent sign of capitulation followed by some buyers finally showing up at opportunistic levels.  This is another short term sign you want to line up with the shorter term MA measure, McClellan Oscillator other breadth and volume extremes.  Once you see how participation is looking as a whole, we can drop down into the sector level and look at where people are participating the most whether that be buying or selling.

On the Sector Level, the AdvDec Line is where we start to get a little longer perspective on how sectors have been acting compared to each other.

As we already mentioned, Technology, Utilities and Real Estate have enjoyed the strongest trends with Technology being more bumpy over the last month.  Energy has stunk for a while and Consumer Staples and Discretionary were also trending pretty well until the last month when the news started ramping.  Interesting to note, Staples have actually taken a bigger hit than the more economically sensitive Discretionary space.  Health Care and Industrials have their pockets, but overall have been pretty lumpy.

The McClellan comparison is a must since we do like the intermediate term view combined with the short term extremes, Summation Indexes can give a good idea of how each sector is holding up overall, but in order to better compare the sectors extreme positioning I turn to the Breadth Thrust Indicator which is bound between 0 to 100 putting them all on the same scale.

Most readings are at or below the lower line which is pretty stretched.  Currently, Utilities have the lowest reading and Health Care is the highest with Energy being the only one that actually increased into the end of the week.

Finally, we take a look at the MA Breadth to see just how many of the sectors are showing extremes in the short and or intermediate measures here as well.

This can give us a good look at which sectors have the fewest components over each reading.  Financials is a good example with only 1.7% above 20sma, 3.98% above the 50sma and 16.48% above the 200sma.  Those are typically unsustainable levels.  Or even shorter term signal showing 0% of the Utilities holdings are above the 20sma.  This is not a sector with a ton of components, but still 0%?  Not very defensive this week even with its evermore attractive yield.  Technology closed the week with the highest reading helped by the late day surge on Friday.  From here, armed with some knowledge of how the markets look on the inside, we can move to the Price action.

Price Charts

Now we can get to where the rubber meets the road in the price charts.  For this exercise, I am going to descend down through the TP Charts from the Monthly down to the 65 minute intra-day view.

From a monthly perspective, the markets are in a strong trend that forged potentially large divergences if they follow through instead of turning into inter trend noise.  Of course, that is mainly because trends on this level are large and take a lot of time to play out, but a potential reversal is on the table here for the large caps and the $IWM is still in a large consolidation, back near a potential support zone as it never made new highs.  All are still in or above the MA bands.

The weekly gives us a better picture of how important a zone we are at in $IWM while the $SPY is also smack into a big potential support zone as well.  The $QQQ has a little more that to go until it reaches its zone, but may not since it has been the leader and is also still some of the best growth stories going both large and small.  $SPY $IWM are testing their RSI bull ranges while $QQQ has a little more room there as well.  These are levels with a good chance of ultimately holding, and if not its more a sign of change.

The daily readings are getting pretty washed out on both the RSI level as well as the CFG companion.  Combine that with the Price action on Friday, we are getting closer short term which is where our next set of clues will come from in the above technical segments.  Friday was a start, but may not be durable depending how the week starts.  I am not willing to guess that as I write this Sunday afternoon and also looking at the Intra-day 65 minute charts. 

This level shows Friday’s action continued to add to the multiple divergences we have seen on the way down, so now we just need to see price confirm the fledgling momentum shift that is trying to get going. 

Conclusion

Conclusion in this sense just means we are coming to the end, not that I have the big answer; instead this post has shown various views of how things look under the hood of these markets.  It is not looking great, but not dire yet either.  So much of it depends on how things go during whatever type of bounce we do get.  I believe that we should be at or close to a near term bottom and that the bounce could be pretty strong if the larger trend is still intact.  If the trend is coming to an end and a major top is being built, we could see a larger battle that will only decide the winner once it commences and plays through.