In this post, we'll highlight that this broadening participation and flight towards risk-assets is more than just a one-week phenomenon. We've seen this type of price behavior in some asset classes for over a month now.
Do you know when stocks making new 52-week relative lows is actually bullish? When we're talking about Consumer Staples.
You see, when the market is falling apart, you're going to see a sympathy bid, specifically on a relative basis, into Consumer Staples. In other words, no matter how bad things get, we're still going to drink beers, smoke cigarettes, brush our teeth and wash our dishes. Those things won't change. We call them Staples.
On the flip side, when stocks are doing well and the major indexes are in uptrends, or bull markets if you want to call them that, Staples are going to underperform. Their safer-haven status and lower beta components tend to lag during the good times.
In early May we outlined the "Five Bull Market Barometers" we're watching to identify the beginning of a new bull market in stocks.
If you haven't read our initial post linked above, we'd encourage you to check it out so you understand what the rationale behind these five indicators is.
It's also worth pointing out that last week we noted that despite the slight improvement in two of these measures, zero of the five were above their key risk levels. Despite that, the market was telling us that the short-term momentum remained to the upside and our long ideas were working well.
After a couple of strong weeks in the market, let's take a look and see how these longer-term indicators have fared.
In recent weeks, we've witnessed a powerful rotation as many of the secular laggards have assumed short-term leadership positions.
In today's post, we're going to take a stab at using a new visualization tool in order to illustrate this recent changing of the guard.
This scatter plot is comparing the maximum drawdown from 52-week highs to the March lows (Y-Axis) with the short-term performance off of the May 13th low, among all of the 150+ Dow Jones Industry Indexes. The plot-sizes are based on how large the current drawdown is... In other words, the bigger the dot, the bigger the drop.
This is a market of stocks, and not just a "stock market".
All of these Indexes, from the Dow Jones Industrial Average to the Russell2000 Small-caps, are made up of components. There are 30 stocks in the Dow and 2000 stocks in the Russell2K, for example.
Are more of them going up? Are more of them making new highs? Are more of them showing bullish momentum characteristics? Are fewer and fewer components doing these things as the indexes make new highs? What about in downtrends? Are more stocks confirming the new lows in the indexes or are fewer and fewer stocks making new lows and showing bearish momentum characteristics as the market makes new lows?
The answers to these types of questions is what we call, "Market Breadth Analysis". There are a lot of ways to do this on all sorts of different time horizons. In this lesson we go over all the methods we use to decipher market breadth, which can be used by both individual traders and the largest financial institutions in the world.
I like to keep a few delta neutral trades active in the portfolio at all times (if I can). It's a good diversifier and also benefits from sleepy or sideways markets that tend to not help any of my directional trades.
So I regularly scan my list of the most active optionable ETFs to pick out the ones with the highest implied volatility and charts that look like the potential for sideways action setting up (ideally). And once again, for the 3rd month in a row, The utilities sector is standing out for me.
The last two strangles worked out. This time, we're gonna do a slightly different twist.
We've been writing about how the momentum is to the upside for the last few weeks, but now prices are testing overhead supply across all the major Nifty indices.
If you haven't read our last few posts we'd highly encourage it, as they outlined our shorter-term views within the context of the long-term trends.
If you're all caught up, then let's take a look at the levels we're watching in the Nifty 50 and other indices.
Here's the Nifty 50 running into overhead supply near 10,000. Momentum failed to reach overbought territory despite the more than 35% rally since the index's March lows.
Thanks to everyone for participating in this week's Mystery Chart. It was a bit of a layup, as most of you were bullish, recognizing the powerful failed breakdown and follow-through back above critical former support.
We would agree and like this chart for a counter-trend move right now as well. But the reason we chose it was really for informational purposes, as we are seeing continuation patterns resolve higher all over the globe right now.
The more of these patterns that resolve to the upside, the stronger the weight of the evidence builds in favor of other consolidations working themselves out higher as well. We are seeing this across all areas of Domestic and International Equity Markets, many of which we'll highlight in this post.
US Stocks remain the strongest game in town, with the Nasdaq 100 closing pennies from all-time highs today.
On the back of that, I wrote a post for US Subscribers outlining what the "safe haven" assets of Yen, Treasury Bonds, and Gold are doing and what it means for stocks as an asset class.
Given that US market action tends to set the tone for the rest of the world, I think it's a good read for Indian market participants as well.
