RPP Report: Review. Preview. Profit. (02-15-2021)

From the desk of Steve Strazza @sstrazza

At the beginning of each week, we publish performance tables for a variety of different asset classes and categories along with commentary on each.

Looking at the past helps put the future into context. In this post, we review the absolute and relative trends at play and preview some of the things we’re watching to profit in the weeks and months ahead.

We continue to harp on the risk-on themes that support our bullish macro thesis.

Rotation down the market-cap scale, commodity strength, and defensive alternatives making new relative lows have been some major themes we continue to see play out.

As participation continues to expand in both the US and abroad, we're being given more and more avenues to position ourselves in order to profit in the current environment.

While Tech and Growth still remain the secular leaders, even the perennial laggards such as Financials and Energy are offering us favorable opportunities from the long side these days.

Bulls are flushed with options to make money in this market, while the list of talking points continues to dwindle for bears.

In what's become a very favorable trading environment, we want to focus as much on the risk profile of the bets we employ capital on as anything else. Identifying and leaning on highly skewed risk/reward setups is the best way to put our money to use right now.

With that said, let's kick things off with our US index table.

Just look at the week Micro-Caps $IWC just had, advancing their relentless leadership versus the other major indexes over all timeframes. Notice how the 1-year performance gets greener the further we go down the table? It's no coincidence and it's why we're still looking for smaller names to buy.

Just look at what the ratio of Micro $IWC vs Mega-Caps $DIA has done since last year. Wow.

Meanwhile, the Large-Cap indexes are slowly, but productively grinding higher on an absolute basis.

Here's the S&P 500 $SPY, Dow Industrials $DJI, and Dow Transports $DJT all stair-stepping to new heights in orderly fashion.

Once the names that drive these indexes start following the path of Small-Caps to new highs (which is already happening), we expect momentum to accelerate in these major indexes.

Mega-Caps have weighed these indexes down since the Summer. We think they're poised to become a tailwind once again.

Last week, the VIX closed below 20 for the first time since the Q1 crash. While we may not talk about the VIX a whole lot around here, this development is not insignificant.

Just three weeks ago, the VIX was at its highest level in history following a S&P 500 decline of less than 5%. Investors were bracing for a serious bout of volatility... and it never came.

In other words, investors are incredibly anxious and many clearly still likely licking their wounds from Q1 of last year.

New highs in stocks + new lows in optimism = a bullish concoction?

We think so. And we think the market is in a perfect position to keep on climbing that "wall of worry" higher.

Seeing the VIX establish a new range beneath that key 20 level would be a bullish development and one that would likely only be happening in an environment that remains highly favorable for risk assets.

Let's discuss our sector section now.

We continue to primarily put our chips on the secular leaders, that is Technology $XLK, Discretionary $XLY, and Communications $XLC.

But, we're also seeing the laggards (Energy $XLE and Financials $XLF) breakout and reclaim important levels on both absolute and relative terms. In fact, over the trailing quarter - these serial underperformers are actually the best performers. Read more about this and how we can profit from it here.

We were joking internally that even Energy, which has been the worst sector for many years, hasn't been left behind in this bull market. If the laggards like Energy can catch a bid, how bad can things be?

Especially considering the new 52-week highs in Oil and yields, we need to ask whether Energy stocks might actually be ready to outperform the broader market.

We like XLE long above 44.

And the same goes for Financials... Which closed out last week at their highest level in history and are already kicking things off with some strong follow-through and breakaway gap higher to kick of this week.

Here's what we said about this space in an RPP Report two weeks ago:

While the absolute trends in many of these names are higher, things are still dicey on a relative basis

While this remains true, it is okay and we can still bet on continued upside from these groups due to the favorable absolute trends at play. More importantly, the risk/reward setups in these ETFs are excellent at current levels with price just breaking to new highs.