Key Takeaway: A healthy level of optimism ushers investors into the holiday season. But lofty expectations are neither reflected in price nor supported by breadth. Participation is struggling to expand beneath the surface and cyclical areas of the market are retesting critical levels of support. A narrow rally running on empty leaves the market vulnerable to disappointment and could challenge high spirits. The question becomes how patient will investors be, especially since consumer sentiment is in the dumps. If the fish aren’t biting, some may prefer to cut bait.
Sentiment Report Chart of the Week: Consumers Are Cranky
As many of you know, something we've been working on internally is using various bottom-up tools and scans to complement our top-down approach. It's really been working for us!
One way we're doing this is by identifying the strongest growth 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.
If you're a technical trader, you don't need to pretend to understand a narrative.
Your only job is to follow the money flow, and as long as you're making money, who cares what the underlying fundamentals are.
We're in the business of making money, not to sound smart to your friends at parties.
Outside of the sector and basic drivers of all the cryptos we're analyzing on a daily basis, we have no idea what a good portion of the cryptos we're buying do. If it were any other way, we would no longer be objective technicians following the money flow.
In most cases, we only begin diving into what they all do after we put on the trade, and it's mostly for fun.
Given an opportunity, JC will gladly talk your ear off about proper wine pairings for your Thanksgiving meals. No matter your flavor or preference, JC can find something that works. After all, he did get his sommeliers certification.
During this morning's analyst meeting, we were discussing what trade we wanted to put on today and we had two great ideas. We debated the merits of each, and we couldn't decide which one we liked best right now.
Stock 1 or Stock 2?
Bills or Dolphins?
Gators or Hurricanes?
Cats or Dogs?
And then in typical JC fashion he said:
Why not both?
And my response was: "Of course! Why not? We'll call it a Thanksgiving Pairing!"
These are the registration details for our Live Monthly Candlestick Strategy Session for Premium Members of All Star Charts.
This month’s Video Conference Call will be held on Wednesday December 1st @ 6PM ET. As always, if you cannot make the call live, the video and slides will be archived and published here along with every other live call since 2015.
Bond yields rising as pressure mounts for Fed to raise rates
From hints of new highs to expansion in new lows, the broad market is being tested.
Commodities, currencies & bonds struggle with risk on message
With schedules of all sorts thrown off by travel and the Thanksgiving holiday (no Townhall conversation this week), this seems like a good chance to review a handful of charts that I’ll be keeping an eye on as we move toward year-end and into 2022.
The 10-year T-Note yield continues to move between its March high (near 1.75) and its August low (below 1.20%). Yields on 2-year and 5-year Treasuries have climbed to new recovery highs as the market has priced in Fed tightening. Given the inflation outlook, much of the debate is on why bond yields are still so low. Take a look at a chart of a global bellwether like Caterpillar (CAT) and the question might become, why are bond yields so high.
Stocks up and down the cap scale were breaking out to new highs and energy futures were resolving higher from multi-year bases -- all while emerging-market and commodity-centric currencies approached year-to-date lows.
Something wasn’t right.
We’d expect these risk-on currencies to catch higher given their strong correlation with other risk assets. But this hasn’t been the case. In fact, seeing as currency markets had been out of sync with other asset classes for months, we really didn’t want to overthink this development.
But what appeared to be another mixed intermarket signal proved a valuable warning.
Fast-forward to today and the weakness that was evident among emerging-market currencies is spreading to stocks and commodities. Small-caps and crude oil are retesting critical breakout levels, and cyclical stocks are failing to sustain their recent moves.
If we know one fact about markets, it's that they trend.
Markets trend; it's why technical analysis works.
Unlike what the university professors will argue, returns are not normally distributed.
It doesn’t matter if you’re a technical analyst, a fundamental analyst, an economist, or whether you look at the moon and the stars to make your buy/sell decisions. You can't argue with the fact that stock prices trend.
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. What remains is a list of stocks that large financial institutions are putting big money behind… and they’re doing so for one reason only: because they think the stock is about to move in their direction and make them a pretty penny.
We’ve already had some great trades come out of this small-cap-focused column since we launched it late last year and started rotating it with our flagship bottom-up scan, “Under The Hood.”
We recently decided to expand our universe to include some mid-caps…
For about a year now, we’ve focused only on Russell 2000 stocks with a market cap between $1 and $2B. That was fun, but it’s time we branch out a bit and allow some new stocks to find their way onto our list.
This past weekend, I finished reading an illuminating book titled "Empires of Light" (see what I did there?), that dug into the origins of modern electric power as viewed through the lens of the first titans of industry to bring it to the masses: Thomas Edison, George Westinghouse, and Nikola Tesla. It was a fantastic read. And one that hit home due to the fact I grew up less than 20 miles away from Niagara Falls, a location which figures prominently in the birth of the nation's electric grid and modeled how to spread electricity transmission throughout the world.
So, it must be kizmit that the best idea on the table for me to choose from today comes from the energy space -- a $170B company that generates, distributes, and sells electric power to customers in North America.
Key Takeaway: Market breadth souring as new lows spike. Absence of breadth thrusts leaves the market adrift and vulnerable to cross breezes. Healthy appetites for risk likely lead to higher bond yields and commodities prices as well as improving broad market trends.
With Energy and Financials experiencing short-term weakness, new leaders have emerged. Consumer Discretionary, Technology and Real Estate are in the top three spots in our relative strength rankings, showing leadership on both an equal-weight and cap-weight basis.
Our industry group heat map shows Semiconductor strength is fueling the leadership coming from the Tech sector.
