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.
Key takeaway: Record highs in equity indexes buoy investor sentiment that has remained optimistic without a significant challenge over the past year. Bulls ticked higher across our sentiment indicators last week, yet we still see evidence that risk appetite is turning (NAAIM Exposure Index, NASDAQ trading volume, overall levels of options activity). These new highs and levels of optimism must contend with the undercurrents of lackluster breadth measures and an absence of pessimism. Risks lie just beneath the surface. This raises the possibility of a more complete sentiment unwind when risks are realized and prices begin to falter.
Sentiment Report Chart of the Week: Know What They Say, Watch What They Do
The latest All Star Charts "Follow The Flow" report is out, and once again there's a great looking opportunity there that caught my eye.
In a nutshell, the Flow report is looking at "a list of stocks that large financial institutions are putting big money behind (via options)… 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."
The opportunity setting up now is in a stock in a sexy sector that looks like it's ready to resume the rocketship ride it embarked on in 2020.
Just because there's no divergence in the A/D line doesn't mean the market can't correct. But if there's a divergence in the A/D line, you better pay attention.
That's what's happening here.
Remember, at first it was just the Nasdaq Advance-Decline line diverging. This one peaked back in early February. Notice how we had a divergence before the COVID crash as well:
The market environment directed our focal point toward the Dollar. And now that it appears risk is coming off the table, we’re shifting our focus to the Yen.
Usually, when we talk about risk-on/risk-off behavior and the Yen, the AUD/JPY is at the center.
Key Takeaway: Indexes make new highs, but action beneath the surface is not encouraging. Equity fund inflows surge in the first half. Bond yields moving lower are unlikely to support equity market strength.
The Energy sector fell out of the top spot in our S&P 500 sector rankings last week, though on an equal-weight basis and at the mid-cap and small-cap level, Energy remains the relative strength leader. Our industry group heat map confirms this broad strength within the Energy sector.
Communication Services and Technology are in the top two spots of our relative strength rankings. Financials and Real Estate round out the leadership group.
This is one of our favorite bottoms-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 bottoms-up scan, "Under The Hood."
To make the cut for our Minor Leagues list, a company must have a market cap between $1 and $2B. There are also price and liquidity filters. Then, we simply sort by proximity to new highs in order to focus on the best players only.
