One of the processes we absolutely love to follow is the Top/Down Analysis approach. In this process, we identify the larger trend and then zoom in and analyse the characteristics that stand out. We look at the asset classes, identify the strongest one, and then deep dive. Next, we look at sectors and identify the pockets of outperformance. Finally, we take a look at an actionable trade that suits our risk and reward parameters.
Don't judge a book by its cover is sage advice I'm sure we've all heard from a parent, teacher or mentor at some point in our lives.
The message is clear. We’re not supposed to read a title or see a label and jump to conclusions. It's always better to get inside and see what something’s all about before deciding to embrace or reject it.
We’re seeing this play out in the market in several ways right now.
When investing in the stock market, we always want to approach it as a market of stocks.
Regardless of the environment, there are always stocks showing leadership and trending higher.
We may have to look harder to identify them depending on current market conditions… but there are always stocks that are going up.
The same can be said for weak stocks. Regardless of the environment, there are always stocks that are going down, too.
We already have multiple scans focusing on stocks making all-time highs, such as Hall of Famers, Minor Leaguers, and the 2 to 100 Club. We filter these universes for stocks that are exhibiting the best momentum and relative strength characteristics.
Clearly, we spend a lot of time identifying and writing about leading stocks every week, via multiple reports. Now, we’re also highlighting lagging stocks on a recurring basis.
While most cryptocurrencies themselves have done well since the summer, many of the most prominent crypto stocks and miners have been painful underperformers.
But, given that many of the biggest coins are in the process of forming potential tradable bottoms, there are early signs of this changing.
Many crypto stocks are also in a process of testing critical levels of support, and the risk versus reward is currently more in favor of the bulls over bears.
Before we dive into individual names, here's a look at the sector as a whole.
We're selling a $NVDA February 260/240 Bull Put spread for an approximately $4.75 credit. This means we’re in the regular February monthly expiration options and we’re short the 260 puts and long an equal amount of 240 puts to define our risk.
Check out our short video with the thought process behind these trades:
Key Takeaway: Investor sentiment surveys are showing waning optimism as 2022 gets underway but there is still little evidence of fear. From a flow and positioning perspective, the 2021 excesses have not been unwound. Equity ETFs continue to record huge inflows even as households have near-record exposure to equities and stocks trade at never before seen valuations. The resolution to these imbalances could come more from rotation than from an outright unwinding. While risk appetite in the US is fading (particularly for the speculative names that were surging higher at this time last year), currency markets suggest renewed interest in global assets. Overseas equities and commodities are gaining strength. They could provide a needed alternative if investors really start to sour on US equities.
The V-Bottom is back! (At least as of the time of this writing). What a bounce stocks have seen off Monday's nadir.
Have we stuck the landing and its back to new all-time highs for the broader indexes soon?
Time will tell. But the short term bet we're making today is that Monday's low will hold at least for a couple weeks. And today's trade in a leading stock in a leading sector reflects this stance. When in doubt, stick with the strongest names in the strongest sectors, right?
In Monday's report, we outlined how conditions haven't fully developed for a high-conviction dip-buy. We're anticipating a high concentration of whipsaws before these assets find a tradable bottom.
At the same time, from a risk-versus-reward perspective, the recent pivot lows are proving to be important levels of interest right now.
In a weekend note, we'd asked whether this was simply a retest of the crash low -- or whether it was still crashing.
Fast-forward today, and the market is respecting this level -- certainly an important one to be watching.
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.
