From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The US Dollar has been trapped in a sideways trading range for the trailing 12 months now. The primary trend is lower, and we continue to see near-term weakness from the DXY Index as well as most USD crosses.
Commodity-centric currencies have been some of the best performers versus the Dollar since early last year, although most of them have been correcting since Q1 or Q2, giving back a good deal of their earlier gains.
So, will we see a resurgence back to those risk-on pairs, or will they keep sliding lower against the Dollar?
Today, we’re going to focus specifically on the currencies of some of the largest oil-producing countries in the world.
This should give us information not just about currency markets, but also commodities and risk assets in general.
Let’s talk about it.
An easy way to aggregate and measure their performance as a group is by analyzing our Petrocurrency Index. It includes currencies like the Canadian Dollar $CAD, the Russian Ruble $RUB, and the Brazilian Real $BRL, among others.
This All Star Charts +Plus Monthly Playbook breaks down the investment universe into a series of largely binary decisions and tactical calls. Paired with our Weight of the Evidence Dashboard, this piece is designed to help active asset allocators follow trends, pursue opportunities, and manage risk.
In yesterday's note, we outlined that this looks very much like a "wait and see" week, with Bitcoin still in this messy sideways range.
44,000 is a big level of interest that the market respected, with prices trading back above our long-term macro risk level of 46,000 this morning.
But we're not really expecting much more than tumbleweeds and a few winners here and there while Bitcoin's stuck below the upper-end of this range near 47,500.
But if we see a breakout above that level, we'll be deploying some more cash into new long positions.
We're seeing this play out with the number of new monthly highs dwindling recently:
Base Metals have long been a part of our conversation here. Specifically, the Commodity supercycle has been one narration that you've been reading here since the end of last year. Of course, the trend hasn't been a simple upward motion. It's been anything but that, to be honest!
But time and again, we get some signals that reach out to us and say, 'we are alive'. It's like waiting for your spacecraft to send you a signal saying it's A-ok. The past week was just that in terms of the base metals move that we saw. Did you see it too?
Earlier this week we shared the metals index making new highs and displaying the strength that we're seeing in this segment. Here is our very own custom index that's basically doing the same thing. You can see how strong the trend has been in the base metals space whereby we witness minor pauses in trend, followed by resumption.
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.
Key Takeaway: Median stock has gone nowhere for six months. Emerging market trends are improving and commodities are moving toward new highs. Inflation weighing on consumer attitudes is a headwind for the economy.
If shopping in the Energy (or Consumer Discretionary) sectors, look in the mid-cap aisles. The Energy sector is near the bottom of the large-cap sector rankings, but at the top of the mid-cap rankings.
Improving relative strength trends for large-cap Food & Staples Retailing and Utilities bear watching as index-level volatility picks up.
As is often the case, the Labor Day Weekend has come and gone and some volatility has been reintroduced to the marketplace. And I say: "Welcome back!" with outstreched arms. Volatility = opportunity. Let's get after it.
With the rising volatility, we're seeing premiums start to pump up in options land. When this is the case, I always start hunting for some delta-neutral credit spread opportunities.
Today's hunt has yielded an excellent candidate with clearly defined levels for us to lean against.
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.
So with all things considered, the alpha taking place within crypto has been catching our attention. But even this asset class has succumbed to the choppy action experienced elsewhere.
The bottom line is that if Bitcoin's below 46,000, the probability of success in new long positions reduces.
Looking more tactically, 44,000 is another critical inflection point. Not only does this conjuncture represent the 38.2% retracement from the recent thrust higher, but also the AVWAPs from all-time highs and July lows, as well as the 50-day moving average.
If we hold above 44k, things are likely not completely falling apart, and though the near-term trend is still choppy, there will still continue to be winners under the surface.
This week we’re looking at a long set up in the Industrial Manufacturing sector. We're seeing a good move here as more stocks break out from their overhead supply zones.
Here's another one that has grabbed our attention.
We retired our "Five Bull Market Barometers" in mid-July last year to make room for a new weekly post that's focused on the three most important charts for the week ahead.
This is that post, so let's jump into this week's edition.
