Welcome to Under the Hood, where we'll cover all the action for the week ended October 28, 2022. This report is published bi-weekly and rotated with our The Minor Leaguers.
What we do here is analyze the most popular stocks during the week and find opportunities to either join in and ride these momentum names higher, or fade the crowd and bet against them.
We use a variety of sources to generate the list of most popular names.
There are so many new data sources available that all we need to do is organize and curate them in a way that shows us exactly what we want: a list of stocks that are seeing an unusual increase in investor interest.
Beyond the mega-cap earnings-related blow-ups of last week, the rally off of the mid-October lows quietly gained strength. At Friday’s close, more than 55% of S&P 500 stocks were trading at new 20-day highs. In our work, that is a breadth thrust - the first since July and only the second since June 2020.
More Context: After stocks were uncharacteristically weak following the July breadth thrust, investors may be more cautious about embracing the latest signal. In this environment it is entirely possible that breadth thrusts are more evidence of volatility than strength. Over the course of my career I have tended to “trust the thrust”, but also believe it is a case of “thrust, but verify.”
Today was a nice consolidation day, with the indices just chopping around. If the indices can continue to trade sideways, we can hopefully work off overbought levels.
I'd like $SPX 3,835 to hold if this market wants to trend higher.
In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
Insurance Claims a Leadership Role
The Equal Weight SPDR Insurance ETF(KIE) just closed at its highest level since April. One thing we know about relative strength is that the stocks and indexes that hold up best during bear markets tend to be the first to make new highs when the selling pressure subsides. We think this group will continue to outperform in the future as it completes a failed head & shoulder top and is only 3% from fresh all-time highs.
Check out this week's Momentum Report, our weekly summation of all the major indexes at a Macro, International, Sector, and Industry Group level.
By analyzing the short-term data in these reports, we get a more tactical view of the current state of markets. This information then helps us put near-term developments into the big picture context and provides insights regarding the structural trends at play.
Let's jump right into it with some of the major takeaways from this week's report:
* ASC Plus Members can access the Momentum Report by clicking the link at the bottom of this post.
Mean reversion is a universal element of the world we live in.
Reversion to the mean is a statistical phenomenon stating that the greater the deviation of a variable from its mean, the greater the probability that the next measured variation will deviate less.
In other words, an extreme event is likely to be followed by a less extreme event.
In financial markets, mean reversion is everywhere. This is especially the case in bear markets when prices dramatically rally following prolonged periods of sustained weakness.
As John Roque, one of the GOATs of technical analysis, would say, "We’re not in a reversion to the mean business. This is instead a reversion beyond the mean business."
Specifically, asset prices retracing to their statistical average isn't the rule, it's the exception. Rather, in most cases, asset prices will often overshoot their "averages."
With crypto markets bouncing over the last week, it raises the question, is this just yet another mean reversion rally, or does this move have some legs?
People would even complain that it was only 5 stocks driving market returns.
Do you remember how hilarious that was?
Good, because it's so much funnier now.
Get this, those same people complaining that only 5 stocks were driving the market higher are now complaining that those 5 stocks aren't participating.
Market returns are currently being driven by all the other stocks. Those 5 big massive ones are doing their very best to hold the market down, but it's not working.
Investors are buying stocks, whether you like it or not. And they're buying the smaller ones at a much faster rate than their larger-cap counterparts.
Look at the Small-cap Russell2000 hitting new Year-to-Date highs vs the Large-cap S&P500.
And of course Small-caps are also hitting new 16-month highs relative to the Nasdaq100:
