February Strategy Session: 3 Key Takeaways

February 2, 2022

From the desk of Steve Strazza @Sstrazza

We held our February Monthly Strategy Session Tuesday night. Premium Members can access and re-watch it here.

Non-members can get a quick recap of the call simply by reading this post each month.

By focusing on long-term, monthly charts, the idea is to take a step back and put things into the context of their structural trends.

This is easily one of our most valuable exercises as it forces us to put aside the day-to-day noise and simply examine markets from a “big picture” point of view.

With that as our backdrop, let’s dive right in and discuss three of the most important charts and/or themes from this month’s call.

1. There’s Energy Stocks… and There’s Everything Else

Most stocks have been under pressure to kick off the new year. However, one group that continues to stand out is energy.

As you can see, the sector was up 18.77% in January, far outpacing everything else. Energy was also the best performing sector last year.

The fact that it's started 2022 so strongly suggests that the relative strength from energy stocks is likely still just in the early innings.

We think these stocks will continue to outperform, and we want to be overweight the group as long as that remains the case.

2. Where Are All the Bulls?

From a sentiment perspective, the backdrop is as positive as we’ve seen it in years. There are fewer bulls right now than we had at the COVID lows back in 2020.

While there is always room for sentiment to turn even more bearish and prices to fall further, this kind of extreme reading suggests we are likely close to a tradable low.

When we look at the Average Bulls (II & AAII) in the chart below, we're at the lowest level since 2016. Optimism has been unwinding for months, and the recent volatility has really led to a notable level of pessimism.

Now that sentiment is at such low levels, it is a tailwind -- and not a headwind -- for risk assets.

3. Will International Stocks Hold the Line?

With equities taking a hit in January and bearish sentiment falling to multi-year lows, we’re seeing a growing number of international stocks and indexes flirt with and even violate critical levels of interest.

The chart below shows the All-Country World Index Ex-US ETF $ACWX and the MSCI Developed Markets Ex-North America ETF $EFA holding above former resistance turned support.

If we breach these levels, it would be a huge bearish development, as this is one of the most significant data points the bulls have right now.

If we break beneath the 2007 and 2018 highs, we can’t be long international equities at the index level. What bulls want to see is for prices to dig in here and finally make a decisive upside resolution from these massive basing patterns.

Things are probably going well for risk assets in general if and when this takes place.