As markets have gotten choppy lately, I've been on the hunt for more bearish and neutral trades to help balance out my predominantly long portfolio.
In this week's Follow the Flow report, Steve Strazza teed up a nice candidate for some downside exposure. The beauty is, the Options Gods are lining it up such that we can affordably take an aggressively bearish position that will pay off nicely if it works, while limiting our risk if we're wrong.
Key takeaway: Optimism most likely peaked earlier this year, as options activity and equity exposure have continued to trend lower in recent months. Yet, our sentiment indicators show no signs of fear. Of course, it’s hard to imagine an environment plagued by fear when the S&P 500 and Nasdaq push to new highs. However, when we look beneath the surface new highs contract while new lows expand. It seems each day a new bearish divergence in breadth emerges, adding to the fragility and deterioration of an already shaky foundation. Without a supportive backdrop, a price correction or volatility event could lead to a meaningful unwind in sentiment.
There's a permeating myth that altcoins need to outperform Bitcoin for there to be a healthy bull market.
You'll often hear claims like "the Ethereum/Bitcoin ratio is making new lows, so the market can't go up."
A similar notion gets thrown in the stock market, that if equal-weight S&P 500 is underperforming its cap-weight counterpart, breadth is said to be "unhealthy".
Though, we've found that to be far from the truth.
In the case of crypto, there have been countless times where the relative leadership has not been in the altcoins, but yet the asset class did just fine.
Just a few short quarters ago, before the alt season kicked off earlier this year, Bitcoin was outperforming nearly every other major coin as seen by the continued progress in its market-cap dominance:
Key Takeaway: Indexes at new highs as new high list contracts and new lows expand. Real bond yields drop to their lowest level on record. Prices are rising as the path for growth becomes more uneven.
Communication Services and Real Estate swapped places near the top of our relative strength rankings for the S&P 500. While Real Estate strength persists through the equal-weight version of the rankings and down the market cap scale, Communication Services relative strength appears to be more selective.
Our industry group heat map reflects recent strength among large-cap groups and relative weakness from the mid-cap and small-cap areas of the market.
This is one of our favorite bottoms-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.
Welcomeback to our latest "Under The Hood" column where we'll cover all the action for the week ended July 23, 2021. This report is published bi-weekly and rotated on-and-off with our "Minor Leaguers" column.
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.
The team pumped out the Saturday Chartoons letter this weekend and as always, there were some nuggets of wisdom and ideas to be found therein.
The tone overall is: we're in a tricky spot here. There are some stocks going up, many stocks going down. But in sum, we're kinda stuck in the mud here for a little bit, it appears.
Of course, if this continues for a bit, then we'll want to keep our eyes out for more delta-neutral credit spreads to add to our portfolio.
There's one sector ETF that was specifically highlighted in this weekend's letter that fits the criteria I look for.
It's fair to say that bulls scored some points in the last few days, with Bitcoin moving back up to the upper 30,000's.
Throughout this recent rally, it was pretty clear that there was a lot of squeeze-action going on, as over $900M in Bitcoin shorts were liquidated in the last 24-hours...
