Sector Drill Down

After looking at the broad picture last week, I wanted to take the next step and drill down to the sector world and see where the participation is really flowing at this point; so I will go through the weekly sector breakdown we perform at RCA.  The markets did just finish a very strong week to start June, therefore, keep in mind that entries might not be immediate for many styles, but monitoring participation as they set up again is worth our effort why this is a major part of our process.

Sector Breadth

We start the review with the Advance Decline Line of each sector.

It should be no surprise to anyone that Technology is leading and already in new high territory.  Once again, it was not just the few mega caps always discussed moving the Technology sector since the lows, but that was the narrative we kept hearing.  Health Care also came very strong off the lows, but has been sideways the last few weeks.  This is one to watch as the price charts are bunched up right below their highs as well.  A new leg higher in the markets likely breaks this out and could get a big move.  Those are the leaders but where have the recent moves come from?  The sharpest move higher in recent weeks comes from the Consumer Discretionary sector as things begin to open back up with pent up spending the expectation.  Right behind were the sharp moves in Basic Materials and Industrials.   Financials, Real Estate and Utilities never really took that much of a hit relatively and while they have lagged until the last week or so, their lines are pretty near new highs.  Rotation may favor these sectors if the markets keep moving in the near term, but doesn’t mean leading sectors should be ignored.
(At bottom, I have posted the Industry AdvDec Lines for review)

Next we move to the MA Breadth to see if it looks similar or if anything special jump out at us.

Other than the sheer strength in the lower two measures, there are only a few things to note here.  Remember we have noted multiple times that the shorter term measures will be less important in this instance due to the velocity of the moves and the slope of those averages.  That said, the first point here is the one sector not pegged in the shorter term measures is Health Care which hasn’t really participated the last couple of weeks, but overall a large number of the holdings are already above the 200 sma which keeps it in a leader seat.  Most of our focus here goes on the %>200sma measures which show us which sectors are making more significant longer term headway.  Technology leads again here with Health Care and Consumer Staples filling out the next two spots.  The Sectors improving the fastest right now are Basic Materials followed by Industrials and then Consumer Discretionary.  A little different order, but same areas improved most last week.  Utilities and Real Estate are lagging more here as more constituents remain below that longer average.  Energy also needs a mention as it is still lagging in both of these first two measures when we look longer term giving it the most opportunity to fail early if the markets begin to lose steam.

McClellan is showing the Summations are all moving pretty well, but here you can see some separation since this started. 

Financials, Industrials, Real Estate, Energy and Utilities are all just moving above zero and have room to move if they can get the Oscillator to cool off without falling out.  Health Care is looking for a kiss on the Summation as the Oscillator is not at extremes and could get back in gear.  This does however also leave open the door to a Summation cross down that would be a potentially important failure in the sector. 

All these remain fluid, but do show incremental improvement and strong breadth across most sectors overall.  Keeping up with the sector breadth can help no matter what your trading style is.  It is integral for us to see early which areas are strongest and weakest as well as which ones got attention first and which are getting it now.

Relative Strength

Now that we see the breadth picture is strong and supports the moves we are seeing, we move to the relative strength review which starts with our 3 sector proxy lists.

I use Vanguard sector funds as the Cap Weighted Sector list.  Here you can see Technology not only gave up the top spot, but dropped all the way down to sixth.

I can’t tell you the last time I saw Energy leading this list even when it did rally, but here we are in 2020 where anything can happen.  The RS movers column has Energy on top as well with a 60 point move this week, but Industrials and Financials are what jump out to me right here.

Next we look at the Equal Weight Sector list which is pretty similar to the cap weighted list at this moment.

On this level the only two that swapped places are Technology and Basic Materials, but otherwise similar.  It is notable that Health Care has come off on these after a strong run.  I note this because strong sectors losing relative strength can be be a sign of digestion as opposed to a rollover.  If breadth is soft short term, strong longer term and RS is lagging then we move to the charts and see a long tight consolidation just under the highs.  If it can hold the chart pattern there is a good chance it is setting up the next move higher.  My RS being a 3 month calculation, it tends to help spot the resting strength.

Finally we look down to the Small Cap Sector list where we can see some real differentiation.  Here is where a lot of the rotation seems to be happening.

By far, the most notable thing here is seeing small cap Technology at the bottom with small cap Health Care just behind it.  These strong sectors are not participating as small caps play some catch up.  While Energy leads here too, if I am looking at small caps for an intermediate move, I would be looking at Financials and Industrials.  Maybe Basic Materials, but that is always a tough sector to hold too long.

Now that we have an idea of where things are flowing in the sector world, let’s dive into each sector list and see what is going on.  Here I am going to post them based on their ranking in the cap weighted proxy list.

Have to start with Energy as it tops the list.  Here Natural Gas has been a leader for weeks and doesn’t look to be changing yet.  Small Cap Energy has made a big move this week up the ranks, but would like to see it hold another week before getting too excited. 

Now I draw attention to the previous leaders TAN FAN and ICLN which have moved to the bottom of the list recently, but are still performing pretty well, just not surging as Energy gets a breath (I also want to note those 100+ readings which aren’t part of my calculations.  For some reason Excel likes to do this with my calculation once in a while.  It is an error, but both of these were leading and in the high 90s back at this date).  If I were looking here for short term, I would concentrate on the small caps.  If looking longer term, might concentrate on the larger more diversified and or stable names.  I actually like the idea of equal weighted here to combine both ideas.

Consumer Discretionary is next being lead for a while by IBUY internet commerce ETF, but this week was eclipsed by the small cap ETF PSCD for the sector.  Homebuilders ITB XHB have done well off the lows and showed consistent RS throughout most of this mess.

Previous leaders pulling back in RS are the gaming plays NERD ESPO GAMR which should be watched closely if Tech catches a bid here soon.  XRT and CARZ are two other movers here that may be worth a look.

Industrials have moved up well recently on all the sector lists and in the breadth readings.  This week the airline ETF JETS seemed to be all the talk moving up to the top spot after being at the bottom of the list since all this started.  After that, the small caps shot up the list as well during the week. 

ITA is another notable mover this week after camping near the bottom in recent months.  Water on the other hand lost its RS and not on my list to rebound strong so far.

Basic Materials has also moved up the RS ranking recently, a good bit on the back of Precious Metals, but other groups seem to be getting involved in this last move while those cool off.

This is another sector I like to look at the equal weighted plays right here as things are broadening out from just focusing on Precious Metals.  Steel made a strong run to the top this week, but many of the broad plays also hit the movers list.  Building materials PKB have been pretty consistently strong moving with the home builders we noted in Consumer Discretionary.  As mentioned gold, silver and its counterparts took a break as the markets firmed up and moved above some major milestones.

Financials have also made a strong move this week out of the laggards group.  Many have been harping the markets can’t go without financials, which I think is completely false with them only representing a 13% weight in the indexes; but am also fine with them participating here.   

Regional banks were the big winners here after a long and ugly period that started well before the crisis hit.  These charts still don’t look great longer term, but are making strong moves out of bases and now adding to some confidence in these markets.  This sector had been lead by Brokers and private equity type financials which are taking a back seat as the banks wake up.  Not sure if this juxtaposition will last a while or not, so I will continue to monitor it closely.  I still prefer the brokers and IAI longer term.

Technology finally shows up on the list after being the leader most of this move off the lows.  That is not necessarily a bad thing if these names are just consolidating.  Many of the largest names look to be in sideways moves that are up to a month old and now, as of Friday, are either breaking higher or pressing up against the top of their respective ranges. 

This leader has a lot of major components that have been resting, so it will be high on my list here to see how it acts this week.  It has not been hard to spot the leadership in Software early and then Internet, but other smaller themes have emerged out of these as well.  Autonomous technology ARKQ has come on strong with the TSLA fame as well as other players in the space.  Mobile Payments IPAY have also seen a good solid move through this pandemic.  The big relative strength move this week showed up most in Semiconductors that look to be taking the reins of Technology in recent weeks and have room to run if they like.

Real Estate comes in next in our list.  This one is surprising many as retail real estate continues to rebound strong. 

Residential and Retail REITS have been getting attention here in recent weeks along with small cap real estate which is concentrated more in the residential as well.  Overall not expecting strong moves here, but can still be a yield play if these firms can hold on to those dividends.

Health Care comes in near the bottom of the list this week; but as I mentioned, it is still a leader I am paying close attention to see if it can break out here.  If so I would expect a quick move back higher in RS for the sector, but while we are waiting let’s see what is going on inside.

Health Care Services were big movers this week.  XHS is the equal weight ETF there and IHF is another.  Note the equal weighted on top suggest the smaller players are getting the most out of this move to leadership within the sector.  Another favorite of mine here moving back near the top is PAWZ after taking a break over the last month.  This is a hot space and one I am excited about longer term, so this resurgence might be a good spot to engage.  I am also still pretty high on Biotech XBI IBB and think this recent rest is a good thing for the sector.

Consumer Staples did lead for a few weeks right off the lows, but have been steadily losing steam until this week.  The price action did wake up a little, but not enough relatively to help stop its RS decline. 

Small caps PSCC moved to the top of the short list which is a short list of choices in this sector.  Not a sector I focus on much, especially when it is not leading.  However, it does play some significance when we look at it lagging from a macro view.

Utilities are playing kaboose right now as they have fallen back to the bottom spot this week.  Not a bad absolute price move, but relatively this is lagging here again.  Another Macro view tell we will keep an eye on.

It is worth noting in this one that PSCU the small cap ETF is the clear leader here in price action since the lows.  NEE is a favorite, but it looks here like the little lesser known players have been the ones to focus on.

Now that we have gone sector by sector to see what is moving within each, let’s move back up the scale and look at the GT Select Sector (119 Sector ETFs) ranked against each other and pull out the top and bottom 25 rankings.  This is not the only way I use the list.  I will also look at the movers here both positive and negative no matter where they fall in the list, but today we will stick with the top and bottom.

The GT Select Top 25 show some of the usual suspects like IBUY ITB PKB which have been fairly consistent leaders through this move, but many others that we are not used to seeing up here near the top.

Of course, Energy plays stand out, but not many had FCG on top (I know a few that did expect this, but not many).  JETS is another one we aren’t used to seeing.  These have been great short term plays and may continue, but make sure you know what you are getting if looking at these (or any for that matter) for new money after a strong move.  However, since my calculation is so short term, many of these could be early if they do build the structure for a longer term move.

The GT Select Bottom 25 list looks to have a lot of the leaders pulling back in recent weeks, but still some that are worth exploring the charts closer to make sure there isn’t still some longer term strength and structure in their favor. 

Health Care space across the board fit this better than most, but I noted IHF and IHI here with IBB always on the radar.  TAN is another I like as it has lost RS, but absolute price action remains solid here on the chart.

This should give you plenty to chew on throughout the week, but hopefully it also gives an idea of how one can participate in these markets without taking the individual risks each company presents.  And, if you prefer those individual names, you can drill down further from here once you see which industries and themes are in focus.  Also remember, with the shorter calculation I use, it can be earlier in the moves than other RS measures you may be used to.  As mentioned earlier in the post, below the disclaimer, you can continue to scroll down and see all of the Advance Decline Line for each of the industries in my universe.

Good luck and as always I hope this helps!

If you like what you see, follow RCA on StockTwits or Twitter.
 
(All market data above are derived from Stockcharts.com, Esignal, and Reutersdatalink)
 
The information set forth here was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy.  Neither the information, nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities or commodities.  I or my affiliates may hold positions or other interests in securities mentioned in the blog.  Full Disclaimer
 
There is no guarantee that the views expressed in this communication will become reality.  Investing in the stock market involves risk and potential loss of principal.  Investment strategies should be thoroughly researched and understood before implementing and none of this should be construed as a recommendation.


 

 

 

 

Reflections from Projections

It feels like forever only to look back and see all this mess started just over 3 months ago with respect to the markets.  A ride like no one has seen and or expected.  Sure there were and always will be the top callers and bottom callers, but usually they are not the ones to listen to.  My last post came about a week and a half into the drop where we discussed being at normal pullback type levels, but things didn’t feel that normal.  As early as the post was, we discussed how markets can stretch, but where ever they stop, a reflexive move taking back at a minimum the last leg down which is usually the panic part of the cycle.  The stretch can only go on so long, so we use breadth to decide when and if it is time and how aggressively to start wading in again.  Finally we build on that using price action and relative strength to figure out where to participate.  I continued to update the breadth situation bi-weekly through Stocktwits and Twitter (@gtlackey) until mid-March when the breadth was completely washed out as the markets were putting stakes in the ground for a turnaround.  It came about a week later.

The fascinating, but not necessarily unusual part is watching the projections from the lows and complete disbelief you hear all the way to where we are today.  Every little pullback was or will be the next move to retest the lows as the wall of worry continues to have the loudest voice.  As we move higher, even those bears are starting to do some buying, but the begrudging tone is through the roof for those who fought this all the way up or worse, nailed it and jumped off after the first 15% for the retest.  This is a stage, but no FOMO in my opinion yet.  While the emotions are high like this, it is nice to have the data to fall back on so I can do my best to stay out of the fray.  It’s a lot of data, but has a nice flow once you get used to it.

PRICE

In all of this price is the most important aspect so let’s take a quick spin down from Monthly to the 65min Triple play charts I post regularly.  First, we have the monthly chart which is impressive considering.  Charts and tables are small on here, but will pop out into new window as needed.

Of course, first mention goes to the $QQQ (and $COMPQ) for a strong hold on the way down and impressive run back to new all time closing highs. The down move never saw the RSI or CFG get below the 50 level.  The $SPY made a larger down move to retest the 2018 lows.  While doing so, it also forged a very big RSI Positive Reversal which targets new highs in the 3600 mark, but I believe more in milestones than targets. Markets will decide where we go.  Larger names have definitely had an easier time than the small guys.  $IWM still has a good bit of room to cover before it gets anywhere near new highs.  It fell the farthest and is currently the only of the 3 in an RSI bear range.  On this level, the rebound off the lows looks strong, but as we drill down you will see it was anything but easy for Small Caps.

The weekly view starts to show a bit more of the back and forth we have seen, but still nothing ominous so far to signal we are topping out.

$QQQs are breaking into an fresh new RSI bull range.  $SPY and $IWM both have more room to cover here before they can cross the RSI 60 threshold.  It is worth noting here that the CFG are already getting into OB territory.  They could certainly continue higher and propel the other two into new RSI bull ranges as well, but this setup also gives some credence to the idea that we could see a summer consolidation before pushing too much further.  $IWM is also notable with a big indecision week as it closed the large gap down from the early throws of the rout.  If it can push through higher in the next week or two without giving much back, it would be a big change of character for the little guys.

Dropping down to the daily levels you can see the noise starts to pick up showing not only the grind, but also the nearly month long consolidation most of the markets went through before moving above in the last week or so.

The $SPY shows the sideways move we just went through the best of the three.  $QQQ continued to run with a few raids along the way, but didn’t really show much consolidation.  $IWM continued to test the fortitude of investors while keeping the naysayers on message.  The problem is, as we will get to in a minute, the breadth never really broke down to support the major rollover calls.  Daily continues to look constructive with all three in RSI bull ranges and above the MA bands.  We are getting near more potential resistance zones, but only potential for now and the daily grind in the overall markets remains impressive and somewhat self-fulfilling at the same time.

The TP 65min chart from Friday is a bit old news since this will be posted on Tuesday morning, but still in the chain.

This shows the intraday view was set up to move higher as well as it ended the week in RSI bull ranges and above MA bands while closing with a strong candle showing little fear of weekend headline risk damaging things.  Investors being willing to take on risk into the weekend shows the fear as a mindset has diminished for the moment while the rhetorical noise of anxiety and worry remains.  

Price charts here still look higher to me.  The only concerning looks at all are the weekly charts that might be due for some pullback or consolidation before we make the final run for new highs, but that will be somewhat dependent on if participation continues to expand or not in the near future.

Breadth

Here we look more for how things are progressing or deteriorating more than absolute levels.  Starting with one of the long term breadth signals, the NHNL differential flipped to all 3 buy signals in early May, but got two of the 3 signals by mid April suggesting this was more than a dead cat.

We haven’t really seen a big run in new highs which is not terribly surprising when looking at the market setup and levels of the price action in the indexes.  This is why the signals are important versus the absolute level of the indicator.

The Advance Decline Line has been the one here that has lagged the most giving way to the weak breadth calls, but this makes some sense when you add a little context.   

We already discussed the $IWM lagging some and having a tougher time getting traction.  This explains some of the AdvDec Line issues.  While it is important for the Economy for smaller companies to thrive, when it comes to market indexes, the market cap gap there lessens some of their overall weight.  Either way, it is now starting to tease new highs as the small caps try to get some traction.

More important to measuring progression is the MA Breadth chart measuring how many names in our universe are above their 20ma, 50ma, 200ma. 


Even through all this, the MA breadth view is one of my favorite reads, the main thing you must do in this instance is understand enough about moving averages to know the velocity in both directions messes with the shorter averages.  That said, the progression of improvement from the short term average up to the longer term 200 moving average is a staple of sustainable moves off of major lows.  A long term buy signal here happened when the %>200sma moved out of the lower quadrant (30% threshold).  We also got a very reliable breadth thrust signal from the %>50sma moving over 90% this week as well.  I choose to pay very close attention to this chart and its progressions while the pundit projections are the weak breadth will be the undoing of this move.  That is not what I am seeing here.

McClellan is probably the best intermediate breadth indicator we have and it gave us some nice signals within a week of the low and continued to defy the cries for a top all the way up. 

We did get the one Summation whipsaw, which is a great signal of its own if you are listening.  Right at the point the short and intermediate term breadth measures were rolling over and giving the bears their best chance, participation kicked in and took the Summation right back to buy telling us the buyers remained in control.  

The AD oscillator using 10 and 20 day moving averages gives a better look at the volatility in the Advance Decline Line.  It hasn’t been straight up strength like the Summation, but has continued to oscillate in the right zones. 

Even when the 10ma hit an extreme, it was at more normal levels, not major bottom extremes pointing to just normal ebb and flow returning to the markets.

Finally on the breadth review, we look at the Percent Days chart that is starting to quiet down some which is also a sign of moving back to normalcy. 

We are still seeing sporadic prints on both sides as volatility is still present in the grind and can get stoked pretty easy as emotions remain high, but overall the knee jerk reactions are lessening as time passes.

Two of the key takeaways from the breadth is the limited weakness during the month of sideways movement and the broadening participation as we moved out of that consolidation in recent weeks.  This is being missed by many and is likely to continue to drive this for a bit.  The rotation we are seeing is not just from sector to sector, but also and maybe more importantly moving down through the size brackets as we will see in the next section.

Relative Strength

Now let’s see where the money is moving to and from as we go back and look at a derivative of price.  Looking at the Macro picture through breadth can be complemented nicely with another view from a relative strength perspective.  Our relative strength calculation is designed more for short to intermediate turns, but looking comparing various ETFs over asset classes as well as many other segmentations paints a solid top down view.

I have recently added a new list of countries to start looking at how the US is faring versus the rest of the world markets.

The higher the US markets can rank the better here.  Having the $QQQ at the top and $IWM $SPY in top 1/3rd works.  Like to see them all in the top half of the list which $IWM just recently surmounted.

Next we look at the Intermarket view.  As we have said before, we want the equity ETFs in the top half here as well, the higher the better.

All are in the top half now that $TLT has ended its long run leading, but having $SLV lead is a bit odd.  Equities have made strong relative strength moves over the last week and last month and the list structure is set up for equity gains as we start June. 

As I alluded to in the breadth view, moving to the Size and Style relative strength list we can see the currently ranking moves from Small Cap Growth at the helm through the progression all the way down to Mega Cap Value at the bottom. 

This shows the broadening and confidence building in this move as we progress from the terrible projections into measurable improvements.  The broad market relative strength views are all currently in equities favor.  Yes, it comes after a strong run, but when combined with the broadening breadth and some developing confidence, this could stick for a while.

We are in a time where tensions are very high and it seems like we are living in the next Jumanji movie with every new week, but the markets are beating to their own drum for now and can continue to do so for a while as long as we continue to see improvement.  Markets focus much more on improvement than they do current situations.  This does not mean there won’t be tape bombs and pullbacks along the way, but so far the technical view does not reflect any overriding ominous danger in the market near term while still building the underpinning wall of worry that continues to manage these markets.  I am going to leave it here for now, but will do a shorter post updating the month end Sector breadth and relative strength in the coming days.

3 Camera Angles for Market Reflection

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.