From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Our focus has been on US Treasury yields in recent months – and for good reason.
The 30-year yield recently undercut its summer lows, and the 10-year yield briefly lost the critical 1.40 level. Both have since recovered. But these crucial rates remain stuck in the same messy ranges that have defined most of 2021.
Given the lack of decisive action in domestic yields, we think it's a good time to check in on the overseas bond markets in hopes of gleaning some insight into the potential direction of yields outside the US.
In today’s post, we’re going to switch things up and take a look at the 10-year yields from other major developed countries.
Key Takeaway: The sentiment backdrop is more characterized by a lack of optimism than widespread pessimism. This is in sharp contrast to the experiences of December 2020 and 2019. In those instances, too much holiday cheer led to hangovers in the year that followed (don’t forget, new highs peaked early in 2021 and many areas have been a sideways mess for months now). The current sentiment backdrop is not dissimilar to (though less extreme than) what was experienced in December 2018. Intense selling that month had investors thinking more about the Grinch than Santa Claus. While probably won’t get widespread pessimism this time around without further volatility - but if we do and investors throw in the towel on stocks, it could ultimately help light a fire that leads to early year breadth thrusts like what we experienced in early 2019.
On Monday morning, if you were on twitter or watching the teevee you'd have assumed the stock market was about to get cut in half and the pitchforks were going to be lining up outside the Federal Reserve building in Washington, D.C.
Then, the market did what the market does and now here we are with the S&P 500 looking like it wants to make another run at all-time highs.
Forget about market volatility --- how about trader's emotional volatility?!
With this in mind, there is still some nice options premium being priced into individual names that offer us some unique tactical opportunities for some quick gains.
There hasn't been much to cover as far as new developments in the cryptocurrency market are concerned.
Bitcoin, Ethereum, and friends have been consolidating and correcting for the better part of two months now. We experienced some volatility in early December, but the damage was quickly repaired. Outside of this, things have been quiet. It's really just been a slow grind lower or sideways for most cryptos since November.
We continue to believe this is a messy market, and patience is the best course of action for a large majority of coins.
Let's recap some of the things we're looking for to signal the recent corrective action has passed. Then we'll check in on some of the leaders as we want to focus on these pockets of strength as they should continue to outperform when the current selling pressure subsides.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Major world currencies continue to struggle against the US dollar.
Both the euro and British pound have been coiling near 52-week lows against the dollar. We’re also seeing weakness spread among commodity-centric currencies, as the Canadian dollar hit new 52-week lows this week, and the Australian dollar accomplished the same earlier in the month. As for the safe-haven Japanese yen, USD/JPY hit its highest level since 2017 at the end of November.
The bottom line is that we continue to see broad strength from the greenback.
As we wait for a resolution either higher or lower, we can look to these individual forex pairs for an indication of which direction we’re likely headed.
Let’s revisit the potential failed breakdown from the Australian dollar earlier in the month and the recent action in the Canadian dollar for clues.
Tactical model argues for caution heading into 2022
Absence of a breadth thrust leaves market looking for energy elsewhere
Liquidity indicator remains supportive but Macro Sentiment and Breadth point to rising risks
There was a story in the WSJ earlier this year about a fund manager who held 900 of his best ideas in his main mutual fund. I saw a model this summer that was made up of nearly 100 individual momentum indicators. Some will use a double-digit number of categories for gauging the market. One more holding, one more indicator, one more lever - it’s as easy as adding one more column in the spreadsheet. If more is better that is great, the question though is at what point is more just too much.
But more recently, market breadth is getting all the attention. Everyone is a breadth expert now, you notice?
I'm even getting software developers asking me about my breadth analysis wishlist so they can build it for me. Which I love and I certainly appreciate, but just goes to show you another sign of the times.
The way I see it, if you're trying to get defensive NOW because of breadth deterioration, I think you might be looking at it completely wrong.
This is one of our favorite bottom-up scans: Follow the Flow. In this note, we simply create a universe of stocks that experienced the most unusual options activity — either bullish or bearish… but NOT both.
We utilize options experts, both internally and through our partnership with The TradeXchange. Then, we dig through the level 2 details and do all the work upfront for our clients. Our goal is to isolate only those options market splashes that represent levered and high-conviction, directional bets.
We also weed out hedging activity and ensure there are no offsetting trades that either neutralize or cap the risk on these unusual options trades.
