We've already had some great trades come out of this Smallcap-focused column since we launched it late last year and began rotating it with our flagship bottoms-up scan, "Under The Hood."
To make the cut for our Minor Leagues list, a company must have a market cap between $1 and $2B. After applying price and liquidity filters, we simply sort by proximity to new highs in order to focus on the best players.
Key Takeaway: Fed-fueled volatility exposes weakness beneath the surface. Breadth trends at odds with index-level resiliency. Drop-in yields and defensive sector leadership consistent with elevated risk environments.
Last week’s volatility produced a shake-up in our relative strength rankings. Materials and Financials both saw big drops, while Technology and Communication Services surged into the lead.
Looking beyond the cap-weighted S&P 500 sectors shows a less decisive shift in leadership - Energy & Real Estate remain strong, both at the sector level and in terms of the industry group heat map.
The process of analysis is such that there are times when trends emerge and times when things are simply messy. Over the past week, with the halt in the trend of the major indices, something emerged on the charts. This something demanded attention.
Negative divergences appear when momentum does not follow the price movement. When there is a disparity between the price move and the indicator, it is a sign of caution. Not to say that a contrary position can be assumed immediately, but the sentiment certainly turns cautious!
So what is it that's hinting at being cautious in this market?
Let's take a look!
The market indices together are saying that the current trend isn't as strong as it seems. Why do we say so?
Here we have our stock universe Nifty 500. This past week's close brought along with it a negative divergence on the chart. As can be seen below, despite the price making a higher high, the indicator went on to mark a lower high. When this happens, we get an insight into the inherent strength of the market. Or in this case, weakness.
Check out this week’s Momentum Report, our weekly summation of all the major indexes at a Macro, International, Sector, and Industry Group level.
By analyzing the short-term data in these reports, we get a more tactical view of the current state of markets. This information then helps us put near-term developments into the context of the big picture and provides insights regarding the structural trends at play.
Let’s jump right into it with some of the major takeaways from this week’s report:
* ASC Plus Members can access the Momentum Report by clicking the link at the bottom of this post.
Our Top 10 report was just published. In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
Using Caterpillar And Copper As A Risk Barometer
On the topic of high-beta names, here’s a behemoth from the Industrial sector. We think of Caterpillar as an index in and of itself - a barometer for global economic growth, reflation, cyclicality, etc. It’s all reflected in CATs stock price, as it is highly correlated with risk assets such as Copper and Emerging Markets. The stock recently made its first lower low in over a year, suggesting we continue to approach these offensive areas with caution. We’ll be watching to see if Copper, and others... even risk-on forex pairs like the Aussie/Yen, will continue to follow Caterpillar’s path. How much structural damage is endured before we get a tradeable bottom in these assets will provide us valuable insight regarding the future market environment for risk-taking.
This week we're looking for a long setup in the Consumer goods sector. With the market finding its way around, defensives like Consumer goods are picking up pace.
Today we will share one such idea that stands out from a risk-reward perspective.
It's Saturday Morning Chartoons time. You can read more about the reasoning behind this post here.
We're just interested in aggregating all of the charts we put together throughout the week and organizing them all into one, easy to flip through deck.
One thing that stood out to me this week was this table of new highs and new lows. It's a great way to visualize what's going on underneath the surface:
We retired our "Five Bull Market Barometers" in mid-July 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.
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Whether you trade commodities or not, it’s been impossible to ignore the recent sell-off in Lumber, as prices have collapsed almost 30% in just the last month.
Well, let’s just say we got a lot more than that! Sometimes markets correct or consolidate through time, and sometimes they correct through price.
And Lumber is most definitely correcting through price!
But Lumber is not the only procyclical commodity to enter a corrective phase. More recently, DR. Copper has begun to digest its recent gains through price as well.
These corrections have already done some damage to the primary uptrends at play as both of these economically sensitive commodities have recently violated critical support levels.
