What we do here is take a chart that’s captured our attention and remove the x and y axes as well as any other labels that could help identify it.
This chart can be any security, in any asset class, on any timeframe. Sometimes, it’s an absolute price chart. Other times, it’s on a relative basis.
It might be a ratio, a custom index, or maybe the price is inverted. It could be all three!
The point is, when we aren’t able to recognize what’s in front of us, we put aside any biases we may have and scrutinize the price behavior objectively.
While you can try to guess the chart, the point is to make a decision…
So let us know what it is: Buy, Sell, or Do Nothing?
From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
The US 10-year yield has made a decisive move back above 1.40% in recent sessions.
We’ve been pounding the table about this critical level for months now--and for a good reason. It’s a vital component of the global growth narrative and rotation into cyclicals.
And most investors probably aren’t prepared for it!
Yesterday, JC and Steve discussed areas that demand attention in a rising rate environment and how we should position ourselves. You can check it out here.
For starters, most currencies versus the US dollar should be beneficiaries of rising rates. This is particularly true for commodity-centric currencies like the Australian dollar, the Canadian dollar, the Russian ruble, and the South African rand.
Bond-fueled cyclical rotation offers opportunity for better participation
Breadth already better beyond our borders
Commodity conflicts
Make no mistake about it, bond yields are rising. Yields on 2-year and 5-year T-Notes have surpassed their 2021 highs and are at levels not seen since their Q1 2020 COVID-related breakdown. The yield on the benchmark 10-year T-Note is above 1.50% and appears headed toward a test of the early 2021 high near 1.75% sooner rather than later.
How high yields could rise in Q4 remains an open question. A two-handle by the end of the year does not seem far-fetched. As recently as 2019, 2’s, 5’s and 10’s all had yields above 2%. With inflation pressures showing little evidence of meaningfully subsiding the path of least resistance for bond yields appears higher.
As we get ready for the final quarter of the year, we need to remember that while guesses are great, we don’t want to get ahead of what is actually happening. Evidence > Assumptions.
This could be the single most important chart in the world right now.
We cannot overstate this development.
We finally got a major resolution in the US 10-year yield, which has reclaimed that critical 1.40% level this week. This begs the question as to what a rising rate environment might mean for investor portfolios. The important implication for stock investors is the renewed tailwind for cyclicals. When rates are rising, sectors like financials, industrials, materials, and energy are all typically outperforming, which is exactly what we’ve started to see in the last week.
And of all these groups, the most direct beneficiary is the regional banks, which are back above their 2018 highs. An overwhelming proportion of their bottom line is tied to lending, so higher yields and widening spreads are a significant tailwind.
You know me, I'm skeptical of everything and everyone.
You have to earn my trust.
And if there's one indicator in this market that has earned my trust and attention over the years, it's the relationship between Consumer Staples and the rest of the market. More specifically, Staples relative to Consumer Discretionary stocks.
You see, when portfolio managers believe stocks are going higher, they are going to overweight Consumer Discretionary stocks. These are things like Retailers, Automobiles and Housing stocks. Areas where "Consumers" spend their "Discretionary" Income.
Consumer Staples, on the other hand, are things "Consumers" are going to spend money on regardless of economic conditions, therefore being "Staples". Think Toothpaste, Laundry Detergent, Beer, Soda and Cigarettes.
As we enter the 4th Quarter of 2021, what better time than the present to check in on market sentiment.
As readers of Allstarcharts.com, we consider you to be the smart money.
So we want to hear from you!
All I'm asking is that you take a few seconds to answer these 7 easy questions, and I promise to send you the final poll results at the end of the week!
In the week gone by, the Realty sector performed exceedingly well. We added the index to our Three Charts for the Week Ahead post as well. The reason for that was that the index constituents are trading at crucial levels.
With the stocks jumping up above their resistances, we thought a post should be dedicated to the Realty sector.
So let's take a look at some interesting ideas.
Realty has been moving sideways for a while after breaching its 2018 highs. In the week gone by, we witnessed a strong move in the index. While the index is trading close to its overhead resistance, the strong momentum could take the price higher.
But about relative strength? Do you reckon there's something there?
Key Takeaway: Bond yields on the rise across the curve. Hints of leadership rotation can be seen in sector work. Higher yields could support breadth improvements.
Energy, which was near the bottom of the rankings from both a cap-weight and equal-weight basis as September began, has continued to gain strength. It has been the top performing sector on a short-term basis (as well as on a YTD basis) and has climbed into the middle of the overall rankings and is at number 2 on an equal-weight basis.
Health Care and Real Estate have dropped in the rankings, though the industry group heat map shows there remain pockets of strength at the industry group level within the Health Care sector.
We’ve already had some great trades come out of this small-cap-focused column since we launched it late last year and started rotating it with our flagship bottoms-up scan, “Under The Hood.”
We recently decided to expand our universe to include some mid-caps….
For about a year now, we’ve focused only on Russell 2000 stocks with a market cap between $1 and $2B. That was fun, but we think it’s time we branch out a bit and allow some new stocks to find their way onto our list.
The way we’re doing this is simple…
To make the cut for our new Minor Leaguers list, a company must have a market cap between $1 and $4B. And it doesn’t have to be a Russell component–it can be any US-listed equity. With participation expanding around the globe, we want all those ADRs in our universe.
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.
There's some clear demand at 40,000, with buyers continuing to defend this floor.
We've been vocal that this has the characteristics of a bear trap as on-chain accumulation heats up, sentiment is in the dumps, and prices are at a logical level to dig in and find support, which is what is taking place.
But in that same breath, we've also been anticipating choppy action in the near term as this demand gradually absorbs all this overhead supply. There's nothing wrong with waiting for a higher conviction entry back above the 46,000-47,000 resistance band knowing that things are well on their way higher. It all comes down to your timeframe and market plan.
