We retired our "Five Bull Market Barometers" in 2020 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.
We’ve had some great trades come out of this small-cap-focused column since we launched it back in 2020 and started rotating it with our flagship bottom-up scan, Under the Hood.
For the first year or so, we focused only on Russell 2000 stocks with a market cap between $1 and $2B.
That was fun, but we wanted to branch out a bit and allow some new stocks to find their way onto our list.
The way we did this is simple…
To make the cut for our revised Minor Leaguers list, a company must have a market cap between $1B and $4B.
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.
In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
A Tale Of Two Markets
2022 has been a tale of two markets. On the one hand, cyclical stocks have shown impressive leadership as they continue to trend higher and make new highs. But then there are growth stocks which continue to lag significantly as they struggle to find a bottom. While this trend is really nothing new, it has accelerated notably in recent months. The bubble chart below is a great way to visualize the dispersion in performance between these two groups of stocks. Whether the leaders catch lower, or the laggards eventually play catch-up is something we’ll have to wait and see. But for now, the two are moving in opposite directions. As long as this is the case, we want to continue positioning ourselves in the strongest groups while staying away from the weakest ones.
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 big picture context 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.
Median CPI from Cleveland Fed is the key inflation report.
April not living up to its ‘best month’ billing.
The race is on for global bonds yields. The 10-year yield in the US is heading toward 3% (a level last touched in 2018), in the UK it’s heading toward 2% (a level last seen in 2015) and in Germany it’s heading toward 1% (a level last reached in 2014). While these global benchmarks are each now contending with their own important thresholds, a decade ago, they were all separated by only a few basis points. Prices for bonds move in the opposite direction of yields, and bond traders are learning how dangerous it can be to try to catch a falling knife.
We held our April Monthly Strategy Session last week. Premium Members can click here to review the recording and download the chartbook.
Non-members can get a quick recap of the call simply by reading this post each month.
By focusing on long-term, monthly charts, the idea is to take a step back and put things into the context of their structural trends.
This is easily one of our most valuable exercises, as it forces us to put aside the day-to-day noise and simply examine markets from a “big picture” point of view.
With that as our backdrop, let’s dive right in and discuss three of the most important charts and/or themes from this month’s call.
When one of the biggest stocks in the world in one of the most well-known names in the world breaks out of a two-year base to new all-time highs, we have to pay attention. There may be a lot of ways to interpret this price action, but one thing we cannot call this action is bearish.
And today's early trading action and elevated options premiums are offering us a good opportunity to get advantageously positioned for a big move.
As of the writing of this note, we're currently watching Bitcoin lose our risk management level of 42,500. We entered into some small hedging positions on the loss of 46,000, but now we're looking to add to our hedging positions/raising cash this morning.
I was just in Boston for a couple of days for a family function.
It had been about a decade since I was last there.
I gotta tell you, I really like Boston a lot. I used to go quite often right after college because I had a lot of buddies who moved there.
Nothing but fond memories.
Anyway, I stayed in Beacon Hill this weekend, which as it turns out is a beautiful part of the city. A ton of bars, restaurants and shops. Right next to the park. Right by the water.
I highly encourage you to take the family and check it out.
So in the afternoon I met a lot of people who I had never met before. Everyone was super nice.
We got into talking about how things were early in my career. I had gone to Catholic school from the age of 4 until I was 22, when I graduated from Fairfield University.
Then came Wall Street. Like 90% Jewish, from what I could tell. I had only known a couple Jewish folks my entire life, until that moment.
What Happens on Expiration Day when I'm holding long options?
I’ve gotten some questions recently about what happens to an open options position if we’re still in it when the contracts expire.
Caveat: I will rarely hold an options contract in ASO trades into expiration unless it’s a winning position and it's going my way. Profit targets or stop loss exits will usually get me out far in advance of expiration day.
