It's one thing to find a great opportunity to make a directional bet. But sometimes it can be be quite a challenge to express that trade with options due to a thin market of options for that stock. This would make a multi-legged options spread especially hard to pull off. In situations like these, I like to leverage the simplicity of naked options.
Last month price finally confirmed many of the divergences we were seeing under the surface and stocks began to correct...yet the Nifty 50 is sitting just shy of its all-time high.
Over the last two months we've been pointing to many divergences in breadth and momentum, as well as intermarket relationships that add to the mixed near-term signals we continue to see around the globe.
Last week I compared the current environment in US Stocks to that of India's a month ago saying the stage was set, but that all these divergences needed price confirmation before they become actionable.
Canada, like a few other Major Indexes from around the globe, continues to churn around all-time highs. So which way will it resolve?
Let's go sector by sector and see what the weight of the evidence suggests, just like JC did for US Stocks.
First, let's start with the TSX Composite, which continues to hover near its 2018 highs as momentum diverges. After a ~20% rally off the December lows and the presence of a flat 200-day, it would be healthy to see some consolidation at current levels before breaking out
Sayings like these give journalists topics to write about. Pro tip: Most of the stuff you'll read is garbage.
“Sell in May and go away, and come back on St. Leger’s Day”
That's where all this Sell in May stuff came from in the first place. The inference here is that there is no point trading in the summer. All the brokers and fund managers will be out in the Hamptons working on their tans. The original saying suggests that the big boys won’t get back to business until Horse Racing season in England is over in the Fall. The British have been celebrating this day in September since the St. Leger Stakes, last leg of the English Triple Crown, was established in 1776. We Americans like to call this time of year, “Football Season”.
It's that time of the month again. This is when we take a step back, reevaluate everything we just saw the past 4 weeks or so, and come back home to the longer-term charts. Life is easier when we're not fighting big trends. While it's important for us to try and identify price levels that could act as support and resistance, this exercise is to determine whether these assets are going up, down or sideways.
Regardless of our time horizon, I think it's important to take these 30-60 minutes a month to acknowledge the bigger trends. Once this is done, then we can work our way down to weekly and daily charts for execution purposes. I say it all the time - My Monthly Candlestick Review is the most valuable 6-10 hours of work I put in each year.
In our most recent All Star Options monthly conference call, JC highlighted why he felt metals might be a good buy here. Inspired by his enthusiasm, we discussed a play in gold that could play nicely in the scenario he laid out.
Last week in our note to Institutional Clients we highlighted the potential for mean-reversion in the relative performance of Small and Micro-Caps, driven by rotation into Financials and Healthcare.
Below is a chart of the Micro-Cap Index (IWC) relative to the S&P 1500, confirming a failed breakdown and bullish momentum divergence. As long as prices are above 0.1405, this ratio looks ripe for some mean-reversion to the upside.
Click on chart to enlarge view.
Same goes for the Russell 2000 relative to the S&P 500, failing to hold its new marginal low as momentum diverges.
With U.S. Markets back at All Time Highs, it would be irresponsible to be doing anything other than keeping close tabs on the price action leaders. And many of these leading stocks will currently be found in the Software sector.
