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Relative Strength on Display

Relative Strength on Display

| October 11, 2017

While the month of January marks the official start to each year, sometimes the month of September gives us the feeling of starting anew.  The Tuesday after Labor Day heralds the official start of the new school year, and nationwide, with summer vacations behind us, we are all getting back to work.  Similar to a New Year’s Day, this first month of fall gives us the opportunity to take stock of where we are, add some new projects to our “to do list,” and refocus on our work to finish the year strongly.  With that in mind, today we want to send you a quick evaluation of where we stand from a technical perspective.

In early August, we witnessed a key relative strength relationship change for the first time in nearly six years.  The relative strength chart of the iShares Emerging Markets ETF (EEM) versus the SPDR S&P 500 ETF Trust (SPY) gave a buy signal on August 7th and now favors Emerging Markets over US Equities.  At this time, the gap between US Equities and International Equities has narrowed from 115 at the start of the year to just 25 signals.

While U.S. Equities continues to hold on to the top spot in our Dynamic Asset Level Investing (DALI) tool, August was a bit of a cooling off period for the asset class.  Our primary participation indicator for the U.S. Equity markets is the NYSE Bullish Percent (BP), a chart that tracks the percent of stocks listed on the NYSE that are trading on Point & Figure buy signals.  The BP for the NYSE stock universe and broader BP for the Optionable universe are both currently in Os.  Just last month, we witnessed virtually every other major US market BP give a similar reversal, telling us that an increasing number of stocks are giving sell signals.  While US Equities remains the number one ranked asset class in DALI, the weakness in the Bullish Percent indicators suggest a lack of broad participation, especially among the smaller cap and value stocks.  After all, the S&P 500 Index (SPX) is up 10% (through 8/31), while the S&P 500 Growth ETF (RPG) is up 17% versus just a 3.5% gain for the S&P 500 Value ETF (RPV).

Now, in the time of writing this piece, we have witnessed these participation indicators reverse back into a column of X’s, telling us that an increasing number of stocks are now giving buy signals.  The recent strength in the Bullish Percent indicators suggest an increase in the broad participation, also known as market breadth.  This is important because one sign of a healthy market is that of a broad participation of stocks in a rising market.

Until next time, cheers!