From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Most risk assets peaked during Q1 or May of this year and have consolidated in sideways ranges ever since.
But the bulls have started to take control of many of these trends. We're seeing more and more upside resolutions -- and this phenomenon isn't limited to Crude Oil, Rates, AUD/JPY, and cyclical stocks. Similar patterns are also playing out when we look at intermarket ratios, particularly those we use to measure risk appetite.
In today’s post, we'll dive into one of our favorite risk-appetite relationships and check for price confirmation in a variety of ratios.
First up is none other than large-cap consumer discretionary versus consumer staples stocks:
As we progress into Q3 of Fiscal Year 2021-2022, this playbook outlines our thoughts on every asset class and our plan to profit.
This playbook will cover our macro view, touching on Equities, Commodities, Currencies, and Rates, as well as outline our views on the major nifty indices and the sector/thematic indices.
We also cover individual stocks we want to be buying to take advantage of the themes discussed in the playbook.
We hate sounding like such a broken record about this level, but we really need to be downright obnoxious about its importance.
Though we think Bitcoin will eventually breakout, we wanted to dive deeper into the near-term risks associated with the leverage that speculators have recently adopted that elevates the risk of another potential long squeeze in the coming weeks.
In this chart, we're looking at Bitcoin's total open interest as well as the open interest held exclusively in perpetual future contracts. Since Bitcoin bottomed at the end of September, we've seen OI jump by a notable $11B in just 3-weeks.
They love writing about 'Selling in May and going away'.
Every year, they just can't get enough of it.
But what about, "Remember to buy in November"?
Historically the best 3 month period of the year for stocks is from November through January.
As my pal Jeff Hirsch likes to say, "Buy in October and Get Yourself Sober".
Here are all the seasonal cycles for the S&P500. The Green line includes every year since 1950 (1-year Cycle), the Blue line includes every year ending in 1 since 1951 (Decennial Cycle), and in Gray every post-election year since 1953 (Presidential Cycle):
(While on vacation until Oct 26th, I’m going to be sharing some anecdotes on my favorite trading strategies: why I use them, when, and how I manage them once they are on.)
Ok, so perhaps there's some recency bias here as the most recent bullish Risk Reversals I've put on have worked. Really though, all that has done is remind me that I should probably do more of these trades.
In a nutshell, a bullish Risk Reversal is a trade where we short naked puts and use those proceeds to pay for long calls. That's right, the market pays me to get long!
The trade is put on for a small net credit (ideally), and the short term goal is to ride an increase in the value of the calls which will allow us to sell a portion of them and use those proceeds to buy-to-close all the naked short puts. This then leaves us long the remaining portion of our calls for free! The calls could eventually reverse on us and go to zero, but we'll still keep the credit we received when we originally put the trade on (plus whatever credit we may have gained when we sold some calls to close all the puts). This is a great situation to be in!
From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
Interest rates, inflation expectations, and commodities are all on the rise.
But as these pieces of the intermarket puzzle fall into place, it’s hard to make sense of the strength in the US Dollar Index $DXY. That’s also been on the rise recently.
Even other areas of the currency market don’t quite fit with the action we see in the USD. We pointed out the absence of risk-off behavior in a post last week where we highlighted the broad weakness in the yen as well as AUD/JPY making new multi-month highs.
So what’s going on with the US Dollar Index?
Let’s look under the hood at some individual USD pairs and their trends across multiple timeframes to see what the weight of the evidence is currently suggesting.
First, let’s look at the short-, intermediate-, and long-term trends in some of the main US dollar crosses:
Custom Risk On / Risk Off Ratio breaking out of an 8-month consolidation
Risk On environment favors Emerging Market strength and leadership from Financials
Intermarket analysis shows higher risk assets outperforming across multiple timeframes
Our ‘Risk On’ / ‘Risk Off’ Ratio is getting back in gear after spending most of 2021 going sideways. The ratio first peaked in February and while it visited and revisited that level multiple times as Spring became Summer, which then became Fall, it had not been able to break out until last week. The improvement in the ratio has been fueled by both an up-turn in the ‘Risk On’ index and a more pronounced down-turn in the ‘Risk Off’ index. On the following pages we will take a closer look at what is driving improvement in one and deterioration in the other.
In yesterday's note, we exercised caution given that Bitcoin achieved our upside target and the growing leverage in the derivative markets.
The strategy for the coming days/weeks is that if Bitcoin is below 65,000, the bias is sideways to lower in the near term.
But when we look out longer-term, the skies could not be any bluer for the asset class.
We're in the camp that Bitcoin will eventually resolve higher, and when it does, it would be irresponsible to NOT be positioned aggressively long crypto.
We're not just talking Bitcoin, but also the altcoins, and even the crypto stocks.
So let's zoom out and identify the backdrop of accumulation that has and continues to take place on-chain.
Now for the risk on developments that we've seen in recent weeks. As you can see here Consumer Discretionary stocks are breaking out relative to Consumer Staples.
If there is one cheat code in the stock market, this may be it.
The bottom line is this: if Discretionary is outperforming Staples, shorting stocks is not the best of strategies:
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. What remains is a list of stocks that large financial institutions are putting big money behind… and they’re doing so for one reason only: because they think the stock is about to move in their direction and make them a pretty penny.
