Louis’ Look (09-22-2020)

Louis Sykes
September 22, 2020

From the desk of Louis Sykes @haumicharts

Welcome to this week’s edition of Louis’ Look, where I share the lessons I’m learning while interning at All Star Charts. You can read the previous post here. Today, I want to touch on how the small elements are the most powerful, particularly in markets.

This weekend, I managed to catch a clear night to go out with my telescope to hunt down the stunning Orion Nebula and Andromeda galaxy, located a mind-blowing two and a half million light-years away. When I found them, they were lying in an empty and devoid section of the night sky.

A tiny sliver of darkness was hiding a sea of beauty and information.

As intense as that may sound, the market is in no way different.

Looking at the financial industry from the outside as an intern, I see people concentrating a disproportionate amount of time on FANG headlines, the recent Nikola gossip, and SPAC drama at the expense of potentially missing what the market is actually doing.

If you want to gauge where the market is positioned, look no further than Microcaps, Smallcaps, and Midcaps.

People seem to have an allergy of talking about these smaller market capitalization stocks, even though they’ve led most sizable market corrections over the last decade.

A recent example of this was when the S&P 500 was making new highs into September, while Microcaps were bucking the trend and making new short term lows. As the guys have said here, this is important because we need to dance with the girl who brought us here.

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Like how the smallest patches of sky reveal the most intricate sights of the Universe, the smallest stocks and areas of the market that nobody pays attention to provide us with the most significant insight.

When we switch our attention to the Renaissance IPO Index, which comprises new, emerging companies who’ve just entered the realms of the public market, it continues to make new highs relative to the S&P 500, in spite of its large weighting in a sector which was the butt of short term selling pressure.

This is another example of how focusing on smaller companies hidden from view can yield vastly different information from only looking at the names on everyone's radar.

Click on the chart to enlarge view.

When we apply that thinking to a sector level, it becomes even more powerful.

As we’ve mentioned repeatedly, sectors and industries like Materials, Transportation, and even Industrials have shown great strength in an environment where the momentum of major market indices has slowed down.

For this reason, it’ll be interesting to see whether these areas can hold their breakouts from a risk appetite perspective.

Click on the chart to enlarge view.

The lesson I'm taking away from the strength of these cyclical trades is that although they're not large enough to move the needle in the major indexes, they provide us with an incredible amount of detail on market participants' appetite for risk.

You simply cannot get a reading of where the river of sector rotation is flowing just by gauging the major market indices.

Before joining the team over here, I never valued these industries and areas that remain out of view to most people. Now, whenever I tweet a chart of a less widely-followed industry making a big move and receive awkward silence in return, I know I'm onto something.

Whether it’s Microcaps, unique data points in scans, or spaces of the market no one touches on...I've learned those are the essential details.

For it’s the areas that no one digs for that provide us the most remarkable insights.

Thanks for reading this week's edition of Louis' Look, and I encourage you to get in touch with me at louis@allstarcharts.com to let me know the lessons you've taken on this week, too.

Louis

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