Sector Breadth Confirms Broad Equity Strength

Want to find something bearish on the market? It’s not hard to throw a rock and find a piece of pessimistic data or commentary that will feed an equity bears appetite. I know my personal bias is to lean more cautious when evaluating the markets, but when the data that I rely on is telling me something different I must respect what its showing. That brings me the market’s breadth, specifically the Advance-Decline Line, which has confirmed the recent strength in U.S. equities (here and here).

We can take this breadth analysis a step further by looking at the individual sectors, and seeing if the strength in the broad market’s breadth is relying heavily on just a few sectors or if strength is stretched across the entire market. Below I have listed the nine S&P sectors using price only data (not adjusting for dividends) and their respective Advance-Decline Lines. The Advance-Decline Line simply adds and subtracts the number of stocks going up and down in a cumulative total. If more stocks are rising, the line will rise and vice versa when more stocks are declining. I use this type of indicator to understand if there’s support for an underlying price movement. If a market or ETF breaks out, I prefer to see broad participation by the underlying stocks.

Materials
While the sector itself is still nearly 8% off its high, its respective Advance-Decline (A-D) Line is already nearly back to its prior high.Materials

Energy
While the Energy sector ($XLE) is still in a down trend of lower highs and lower lows, it’s breadth has improved somewhat as it advances with price to challenge its prior high.Energy

Financials
Financials ($XLF) have been one of the worst performing sectors YTD, largely attributed to the declining yield curve. However, when looking at the performance of the individual financial names, the $XLF A-D Line is already at a new high.financial

Industrials
When taking into account dividends, $XLI is already at a new high but when looking at just price it still sits a few cents under its 2015 peak. But once again, the sector’s breadth measurement has already set a new high. industrial

Technology
Tech ($XLK) is right at its 2016 high and is just itching to breakout and so far it has the full support of its A-D Line as it broke its April ’16 high back in June.
technologyConsumer Staples
$XLP has been in a clear up trend as it makes new highs in price for the bulk of the last year. What about its Advance-Decline Line? Yep, right there with it as it marches higher.
consumer staples

Utilities
Utilities ($XLU) has been one of the stronger performing sectors YTD, clearing its 2015 high back in May. It’s A-D Line has created almost a straight line higher as individual utility names retain their up trends.utilities

Health Care
The Health Care ($XLV) sector still sits below its high but has recently broken above a level of resistance around $73. The A-D Line for the sector has been leading price higher, having already made a new high.health care
Consumer Discretionary
The Consumer Disc. ($XLY) sector is just under its prior high but its breadth has already broken out.consumer disc

As you can see, from a breadth perspective using the sector’s individual Advance-Decline Lines, the market appears to be much healthier than what the macro economists would lead you to believe. I understand profit margins are contracting, margin debt is high, Europe is falling apart but there is a difference between economies and markets, and we’re seeing a clear separation when looking at the major nine S&P sectors and their respective breadth indicators.

While it’s possible we see the market digest these gains and see some type of back-filling, it’s hard to argue that the current up trend is anything but strong based on the underlying breadth strength in the S&P sectors.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

About Andrew Thrasher, CMT

Andrew Thrasher, CMT is a Portfolio Manager for Financial Enhancement Group, LLC, an asset management firm in Central Indiana and founder of Thrasher Analytics, an independent financial market research firm. He specializes in technical analysis as well as macro economic developments.