Key Takeaway: Bulls continue to retreat while bears remain relatively unchanged. The current imbalance in sentiment speaks to cooling optimism and an increasing degree of caution. In recent weeks bears have been on the rise, but so far that has been a short term event. It does not mean that all has been repaired from a sentiment perspective. On the contrary, risks remain elevated. If history is any lesson, the fear and pessimism associated with a complete unwind in optimism will not materialize without instigation from downside volatility. It’s often falling prices that lead the way and fan the flames.
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.
Cryptocurrencies are every technical analyst's dream.
No gaps.
24/7 markets.
No circuit breakers.
Countless technical tools.
No arbitrary fundamental models.
No government intervention.
Pure supply and demand at work.
Without getting too philosophical, there's a trend in traditional markets toward the democratization of financial information. Nowadays, people have almost the same access to data and platforms as the bigger guys. There are projects like Koyfin that are leveling the playing field and giving the small guy opportunities they didn't have just a few decades ago.
If you like action, then you've enjoyed this week so far.
The markets looked ho-hum for most of the day Monday. But then the last hour offered us a harbinger of things to come. And Tuesday's gap and crap confirmed the bulls' worst fears.
But as usual, bears might have gotten a bit ahead of themselves as today's action seems to suggest.
Either way, the indecision and confusion in the markets is resulting in elevated options premiums -- which is what we can expect. As options players, this puts us in the position of wanting to look for opportunities to take the other side of this fear by getting short these elevated premiums.
Scanning my list of my liquid ETFs, I've found a great candidate to sell premium in.
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 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?
From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
The US 10-year yield has made a decisive move back above 1.40% in recent sessions.
We’ve been pounding the table about this critical level for months now--and for a good reason. It’s a vital component of the global growth narrative and rotation into cyclicals.
And most investors probably aren’t prepared for it!
Yesterday, JC and Steve discussed areas that demand attention in a rising rate environment and how we should position ourselves. You can check it out here.
For starters, most currencies versus the US dollar should be beneficiaries of rising rates. This is particularly true for commodity-centric currencies like the Australian dollar, the Canadian dollar, the Russian ruble, and the South African rand.
Bond-fueled cyclical rotation offers opportunity for better participation
Breadth already better beyond our borders
Commodity conflicts
Make no mistake about it, bond yields are rising. Yields on 2-year and 5-year T-Notes have surpassed their 2021 highs and are at levels not seen since their Q1 2020 COVID-related breakdown. The yield on the benchmark 10-year T-Note is above 1.50% and appears headed toward a test of the early 2021 high near 1.75% sooner rather than later.
How high yields could rise in Q4 remains an open question. A two-handle by the end of the year does not seem far-fetched. As recently as 2019, 2’s, 5’s and 10’s all had yields above 2%. With inflation pressures showing little evidence of meaningfully subsiding the path of least resistance for bond yields appears higher.
As we get ready for the final quarter of the year, we need to remember that while guesses are great, we don’t want to get ahead of what is actually happening. Evidence > Assumptions.
This could be the single most important chart in the world right now.
We cannot overstate this development.
We finally got a major resolution in the US 10-year yield, which has reclaimed that critical 1.40% level this week. This begs the question as to what a rising rate environment might mean for investor portfolios. The important implication for stock investors is the renewed tailwind for cyclicals. When rates are rising, sectors like financials, industrials, materials, and energy are all typically outperforming, which is exactly what we’ve started to see in the last week.
And of all these groups, the most direct beneficiary is the regional banks, which are back above their 2018 highs. An overwhelming proportion of their bottom line is tied to lending, so higher yields and widening spreads are a significant tailwind.
You know me, I'm skeptical of everything and everyone.
You have to earn my trust.
And if there's one indicator in this market that has earned my trust and attention over the years, it's the relationship between Consumer Staples and the rest of the market. More specifically, Staples relative to Consumer Discretionary stocks.
You see, when portfolio managers believe stocks are going higher, they are going to overweight Consumer Discretionary stocks. These are things like Retailers, Automobiles and Housing stocks. Areas where "Consumers" spend their "Discretionary" Income.
Consumer Staples, on the other hand, are things "Consumers" are going to spend money on regardless of economic conditions, therefore being "Staples". Think Toothpaste, Laundry Detergent, Beer, Soda and Cigarettes.
As we enter the 4th Quarter of 2021, what better time than the present to check in on market sentiment.
As readers of Allstarcharts.com, we consider you to be the smart money.
So we want to hear from you!
All I'm asking is that you take a few seconds to answer these 7 easy questions, and I promise to send you the final poll results at the end of the week!
In the week gone by, the Realty sector performed exceedingly well. We added the index to our Three Charts for the Week Ahead post as well. The reason for that was that the index constituents are trading at crucial levels.
With the stocks jumping up above their resistances, we thought a post should be dedicated to the Realty sector.
So let's take a look at some interesting ideas.
Realty has been moving sideways for a while after breaching its 2018 highs. In the week gone by, we witnessed a strong move in the index. While the index is trading close to its overhead resistance, the strong momentum could take the price higher.
But about relative strength? Do you reckon there's something there?
