We all know the universal disclaimer: past performance being no guarantee of future results.
But what has worked recently always gets a ton of attention from Wall Street. And for the past decade, buying and holding US large-cap stocks has worked.
If you’ve benefited from that trend, you deserve congratulations. Deviating from the principles of diversification and putting all your investment eggs in that one basket has increased your return and reduced volatility. To some extent, the worse your behavior (relative to theory), the greater your reward.
There is plenty of historical data that says that was not supposed to happen. But it did. Price is price, and we don't argue with it. Lived experience takes place in the space between theory and anecdote. That is where most actual investment decisions take place as well.
But we can only celebrate the last victory for so long before getting ready for the next game.
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 of 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?
We're back to share with you, what we love to do and that is the Top/Down approach. At All Star Charts we're big fans of the weight of the evidence. The market tells us where it's going, and we listen. It's pretty simple really.
Over the past couple of weeks, we've noticed the PSU banks bouncing off their support and actually displaying some strength.
So today, let's take a look at what this particular sector is hinting at.
Something we’ve been working on internally this year is using various bottoms-up tools and scans to complement our top-down approach. One way we’re doing this is by identifying stocks as they climb the market-cap ladder from small, to mid, to large, and ultimately to mega-cap status (over $200B).
Once they graduate from small-cap to mid-cap status (over $2B) they come on our radar. Likewise, when they surpass the roughly $30B mark, they roll off our list.
But the scan doesn’t just end there. We only want to look at the strongest growth industries in the market as that is typically where these potential 50-baggers come from.
Housing market activity restrained by supply imbalances
Surging demand and lack of supply sends home prices to record levels
Buyers becoming price-sensitive and home buying plans plummet
I’ll start by acknowledging more questions than answers on this subject. But that itself is part of the point. The housing market was one of the earliest parts of the economy to bounce back last year, but activity in recent months has been more uneven. Existing home sales in April unexpectedly fell (and are at their lowest level since June) and new home sales fell more than expected last month and data for the preceding month was revised lower. There is evidence that supply constraints (in terms of both current housing stock as well as workers and supplies necessary to build additional units) are weighing on activity. But when something as diverse and complex as the national housing market gets wrapped up in a narrative that is almost universally endorsed, I get more than a little skeptical.
JC put out a post recently discussing the weakness in small-cap stocks. He makes a pretty compelling case for why they could be leaders in a big way on the downside if the stock market rolls over here. But of course, as we've seen time and again in recent years, so many breakdowns have proven to be false and the whipsaw back to new highs has been violent.
Here's what he laid out for $IWM that has my attention:
The Outperformers is our newest scan that pinpoints the very best stocks in the market. It’s the fastest, easiest way to find quality names that are primed for major moves.
The goal is that as the market rally progresses, the sector rotation within the market will reflect in this scan. So while our Top/Down Analysis helps us with the broader view of the market, this Bottom/Up scan makes sure that we catch the slightest change in sentiment.
They say that you shouldn't kick someone when they're down. But in the markets, that's actually the best time to kick them, when they're already down.
We call that "Relative Weakness". When we're shorting stocks, those are the ones we're looking for.
In the case of Small-caps, they've been a heads up of a problem in the stock market since almost 3 months ago. They suggested stocks would struggle and would go sideways, at best.
And that's exactly what we've seen. Many stocks and sectors going sideways, and a bunch of them going down.
BUT, if we're going to go from Bad to Worse, then Small-caps are most likely the ones getting hit the hardest.
You can see in these breadth numbers that the internals in Small-caps have not been improving, they've actually been getting worse.
Key takeaway: Sentiment continues to shift from optimism to pessimism. Unlike the March optimism unwind, the current situation is associated with a waning risk appetite on the part of investors and a more challenging liquidity environment. This argues for patience from a tactical perspective and warns against a premature conclusion that the speculative excesses have been removed from the system. While the pullbacks in some of the speculative areas may seem substantial, they still pale in comparison to the run-ups that were seen in late 2020 and early 2021. In such an environment, less may be more. Surviving such unwinds is not only about preserving capital, but also maintaining mental health.
Sentiment Report Chart of the Week: Risk Appetite Wanes
From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
We’ve recently pointed out the possible double tops in the Dollar index and the USD/CAD, along with our overall outlook for further weakness from king dollar.
But can we find other areas of the market that could provide further insight into the US Dollar’s direction?
After all, many market participants are fixated on the direction of the US Dollar right now as it approaches its key mutlti-year lows.
Why does the Dollar matter so much to investors?
Firs of all, USD and risk assets have had a very strong negative correlation over the last several years. The USD Index bottomed in early 2018 as stock markets around the world peaked. Conversely, the dollar topped during the Covid sell-off when stocks bottomed out at their March 2020 lows.
To gain a clearer picture of the USD, we need to go beyond the Dollar Index and developed currencies.
