Housing market activity restrained by supply imbalances
Surging demand and lack of supply sends home prices to record levels
Buyers becoming price-sensitive and home buying plans plummet
I’ll start by acknowledging more questions than answers on this subject. But that itself is part of the point. The housing market was one of the earliest parts of the economy to bounce back last year, but activity in recent months has been more uneven. Existing home sales in April unexpectedly fell (and are at their lowest level since June) and new home sales fell more than expected last month and data for the preceding month was revised lower. There is evidence that supply constraints (in terms of both current housing stock as well as workers and supplies necessary to build additional units) are weighing on activity. But when something as diverse and complex as the national housing market gets wrapped up in a narrative that is almost universally endorsed, I get more than a little skeptical.
JC put out a post recently discussing the weakness in small-cap stocks. He makes a pretty compelling case for why they could be leaders in a big way on the downside if the stock market rolls over here. But of course, as we've seen time and again in recent years, so many breakdowns have proven to be false and the whipsaw back to new highs has been violent.
Here's what he laid out for $IWM that has my attention:
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.
They say that you shouldn't kick someone when they're down. But in the markets, that's actually the best time to kick them, when they're already down.
We call that "Relative Weakness". When we're shorting stocks, those are the ones we're looking for.
In the case of Small-caps, they've been a heads up of a problem in the stock market since almost 3 months ago. They suggested stocks would struggle and would go sideways, at best.
And that's exactly what we've seen. Many stocks and sectors going sideways, and a bunch of them going down.
BUT, if we're going to go from Bad to Worse, then Small-caps are most likely the ones getting hit the hardest.
You can see in these breadth numbers that the internals in Small-caps have not been improving, they've actually been getting worse.
Key takeaway: Sentiment continues to shift from optimism to pessimism. Unlike the March optimism unwind, the current situation is associated with a waning risk appetite on the part of investors and a more challenging liquidity environment. This argues for patience from a tactical perspective and warns against a premature conclusion that the speculative excesses have been removed from the system. While the pullbacks in some of the speculative areas may seem substantial, they still pale in comparison to the run-ups that were seen in late 2020 and early 2021. In such an environment, less may be more. Surviving such unwinds is not only about preserving capital, but also maintaining mental health.
Sentiment Report Chart of the Week: Risk Appetite Wanes
From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
We’ve recently pointed out the possible double tops in the Dollar index and the USD/CAD, along with our overall outlook for further weakness from king dollar.
But can we find other areas of the market that could provide further insight into the US Dollar’s direction?
After all, many market participants are fixated on the direction of the US Dollar right now as it approaches its key mutlti-year lows.
Why does the Dollar matter so much to investors?
Firs of all, USD and risk assets have had a very strong negative correlation over the last several years. The USD Index bottomed in early 2018 as stock markets around the world peaked. Conversely, the dollar topped during the Covid sell-off when stocks bottomed out at their March 2020 lows.
To gain a clearer picture of the USD, we need to go beyond the Dollar Index and developed currencies.
Key Takeaway: Mixed liquidity backdrop makes rebuilding risk appetites more of a challenge. Tailwinds that have fueled cyclical strength are tapering even if the Fed is not yet ready to. Breadth on a slippery slope from digestion to deterioration to downtrend.
While the indexes themselves continue to hold up relatively well, there is evidence of deterioration that cannot be overlooked from a tactical perspective. Whether this builds into a situation that argues for more defensive positioning from a cyclical perspective remains to be seen.
We've already had some great trades come out of this Small-Cap focused column since we launched it late last year and began 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. After applying price and liquidity filters, we simply sort by proximity to new highs in order to focus on the best players.
The ASC team had a post out last week highlighting some bullish developments here, and the strength continues in early trading this week. And one stock, in particular, is threatening new all-time highs coupled with declining options prices --- my favorite kind of setup.
