The ‘Value’ Of Analyzing Internals

May 13, 2021

From the desk of Steve Strazza @Sstrazza and Grant Hawkridge @Granthawkridge

We’ve been vocal about the strong market internals supporting equities for some time.

We’ve seen one extreme breadth reading after the next from just about all of the major indexes and sectors since last summer.

One index that hasn’t shown a bullish initiation thrust like its peers is the Nasdaq.

We recently pointed out the NASDAQ Composite showing a substantial deterioration in 52-week highs the past few weeks...

But there are still areas of the market with strong & expanding internals. Breadth data continues to be mixed just like we’re seeing from many asset classes right now.

Using equities as an example, while growth has been weak, value and cyclical areas remain strong.

Here’s a look at the Russell 1000 Value chart along with its percentage of new 52-week highs:

The last time so many value stocks were making new 52-week highs was back in 2013.

There is no better way to confirm the new highs in price than to see it accompanied by such a strong expansion in participation.

The percentage of large-cap value stocks making new 52-week highs just spiked to its highest level in over a decade.

In fact, several indexes and sectors just registered their highest readings in over 10-years in this key breadth indicator.

Data like this continues to suggest we want to favor these areas while money is flowing out of technology and growth. Let's look at some of them now.

Here is the Financial sector SPDR along with its percentage of stocks making new 52-week highs $XLF:

Since the Financial sector broke back above its 2020 highs, the internals have continued to support this breakout as evidenced by the expansion in new 52-week highs in the chart above. This reading hit an extreme of 75% last week.

We see similar confirmation and strong breadth from the Industrial sector $XLI which reached 51% last week:

While not as much of an extreme as the others, this is still its highest reading since 2018 and one of the highest looking back over a decade.

The Materials sector $XLB reached a high of 60% last week, a level it hasn't seen in over a decade.

The bottom line is that seeing internal strength like this from the current value leadership groups makes sense.

All these charts are signaling to us that cyclical areas of the market are still as healthy as ever, supported by arguably the broadest participation in a decade.

Although and as with most things, this always depends on your timeframe. Such extreme readings are also often a sign of caution in the near term. So it’s no surprise that markets are under pressure this week with internals as exhausted as they are.

But when we look out over the coming months and quarters, these bullish breadth readings suggest that value remains strong and is gearing up for a new cyclical bull run. It also supports our view that markets are likely to stay choppy and bifurcated for the foreseeable future.

We’ll be monitoring these internals for clues as to the future direction of these trends and you already know we are in the camp that the recent rotation into value and out of growth is more than just a counter-trend development.

So in the short-term this could be a red flag and signal some corrective action, but looking out over longer timeframes this is yet another bullish initiation thrust, and suggests this new bull market is still in the early innings… at least for value.

Do you think we have this one right?

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Thanks for reading and please let us know if you have any questions!

Allstarcharts Team