Market Breadth has been a hot topic as of late, which is why we've talked about it here, here, here, and here over the last month. Last week we discussed market breadth from a global perspective by measuring the trends and momentum readings of stock markets from all around the world, as well as the US sectors and sub-sectors. Today we're going to expand on that by looking at the internals specific to the US stock market. I will warn you in advance that this is a bit of a long post, but I don't want to give the bears a chance to say that we're relying too heavily on one or two charts to support our conclusion.
This past week I came across a potential trade setup in an Indian micro-cap stock that really got me thinking about the question, "Who am I as a market participant?". With all the noise created on a daily basis, it's easy to lose sight of your answer to this simple question, but doing so inhibits your ability to make any decision about markets responsibly.
Before we start again with Season 2 of the Allstarcharts Interviews, I wanted to introduce you to our new Chief Options Strategist at Allstarcharts.com - options wizard Sean McLaughlin! Many of you already know him as @chicagosean. When it comes to the Greeks, this is the guy you want on your side, so we're lucky to have him. In this podcast episode, Sean and I talk about Trading, Social Media, Taking Vacations, Books to Read and of course, Options! This was a fun conversation to have and I think there are a lot of pieces of value to take away from this one.
You have two options as an investor: you could listen to the media or you could listen to the market. They've been pushing the notion lately that only a handful of Tech stocks are leading the way for the market, suggesting a weakening breadth environment. In the real world, however, we are participating in a united rally among Tech stocks as a group.
In fact, the Equally-Weighted Technology Index went out just 0.4% away from another all-time weekly closing high, just shy of it's record high set last month. This is the Equally-Weighted Index, not the Cap-weighted index that the bears are suggesting is pointing to weakening breadth because the big names are such a large portion. If it was true that only a handful of names are going up and market breadth is deteriorating, the Equally-weighted index, which takes the extra-large market capitalization stocks completely out of the equation, would not be behaving this way.
I love getting questions from our subscribers to All Star Options. It shows they are engaged and eager to learn or to get clarification as they learn our processes. We get questions every day. Here's one I received recently that I thought held a lesson we could all benefit from:
We are in the tricky part of the quarterly cycle where upcoming earnings warrant caution on options trades in individual names. Premiums get elevated ahead of the uncertainty heading into each earnings event, so that makes being long premium an undesirable idea. Meanwhile, it makes me uncomfortable getting short elevated premiums into these events because of the risk of an outsized move blowing through any short strikes I may have on.
And of course and ironically, with summer in full swing, broader indexes are seeing declining volatilities which makes it tougher to put on good credit spreads.
But your boy hasn't given up looking for opportunities, and I see a good one shaping up in the Utilities space.
The Nasdaq 100 just hit another all-time high, as did the amount of people quoting the percentage of the index's gains that are from its top five components. While that makes for a good headline and soundbite, it's not really all that actionable. What is actionable is the chart below, which we spoke about in early June.
It's been quite a few years since I did these youtube videos, but with the help of technology and a solid team, this is something we can start doing again on a regular basis.
Here is the first video with a throwback to the old days and then we get into Consumer Discretionary stocks and why I think they will continue to be a leading indicator for the overall market.
Large-caps in India have been on a tear relative to their small and mid-cap counterparts, which we've spoken about at length over the last few months. With that said, it's no surprise to see that the Nifty 50 is leading to the upside once again by clearing its recent range on an absolute basis and making new 5-month closing highs.
Perhaps it's the overwhelming number of afflicted Bears coming in to emergency rooms, pharmacies (for pain meds), and therapists couches across America that is fueling the continued bull market in healthcare stocks? Interesting thought.
But we're not fundamentalists here, we just follow price action, volume, and with our options trades -- volatility. And those three things are pointing to a great opportunity for profits in the $XLV Healthcare ETF.
Some people look at Utility stocks doing well as something negative. I never understood that. They suggest that an uptrend in a sector that is looked upon as "defensive" is not something characteristic of a stock market that is going up. But, in fact, it is. With Utilities pressing against all-time highs again, now is as good of a time as any to remind ourselves that they indeed move with the overall stock market over time.
