From the desk of Steve Strazza @sstrazza and Louis Sykes @haumicharts
At the beginning of each week, we publish performance tables for a variety of different asset classes and categories along with commentary on each.
Looking at the past helps put the future into context. In this post, we review the absolute and relative trends at play and preview some of the things we’re watching in order to profit in the weeks and months ahead.
As we discussed in last week’s report, bears have a lot of work cut out for them.
With all this rotation into offensive groups and cyclical areas of the market, they are really running out of talking points. We literally can’t find a meaningful group of stocks in the US or even abroad that we would want to short at this point.
This is excellent information as it’s not something we can say very often… and it’s bullish, just to be clear.
The move higher in equities is being supported by significant cap-rotation at the index level as well as broad participation among sectors, and most recently, even international stock markets.
Basically, it’s hard to find stocks that aren’t in uptrends… anywhere.
Let’s kick things off with our US Index table now.
Take a look at our secular leader, the Nasdaq 100 $QQQ which was the week’s top-performer with a 4.35% gain.
The sustained bid for SMIDs and Micro-Caps that’s taken place since last year allowed Large-Cap indexes ample time to digest their gains and consolidate in a healthy fashion. They did just that for a few months and are now grinding gradually higher again.
Evidence continues to suggest the big guys will likely reassert their leadership over the coming months so we’re positioning ourselves for a rotation back into Mega-Cap Growth.
The price action leading up to the recent earnings for these big names has been constructive. Netflix $NFLX kicked off the upcoming reporting season on Wednesday with a big beat and 12% gap higher.
The remainder of the largest Mega-Cap Growth stocks in the US are releasing their numbers next week. We think this could be the catalyst for a lot of these stocks to finally make decisive resolutions higher from their recent continuation patterns. This would reinforce our thesis of rotation moving back up the market-cap scale.
On the other hand, we could see a downside reaction from earnings which could act as the breaking point for these names, sparking downside resolutions and/or failed breakouts from these continuation patterns. That’s not the bet we’re making but it’s always a possibility.
To be clear, we still like SMIDs from a structural perspective, we just believe that things have moved a bit too far too fast, particularly on a relative basis, and could unwind significantly in the coming months.
Due to such extreme outperformance recently, there is room for a material countertrend move to take place without damaging the long-term trend, which is currently pointing to a reversal in favor of SMIDs.
This key inflection point in the Mega-Cap vs Micro-Cap ratio visualizes this dynamic well.
After an aggressive decline following the break of the neckline in November, the ratio is at a logical level of support as it approaches key multi-year lows. We’re seeing similar developments in other Large vs Small ratios we monitor.
We mentioned earlier that we don’t even want to be shorting Energy stocks. Sounds crazy, I know.
We tried shorting a handful of stocks in April of last year and got steamrolled. We learned our lesson and haven’t put out any shorts since.
The market was telling us way back then that longs were getting rewarded, and shorts were getting decimated. Well, it’s been almost a year since then, and the market continues to be a very dangerous place for short-sellers.
Here’s the Goldman Sachs Index of the 50 most-shortest stocks in the Russell 3000 with a market cap over $1B.
Just look at that relentless bid. The poster child for short squeezes, Gamestop $GME is up about 60% intraday as I write this.
We’re in an environment where there seems to be indiscriminate buying of stocks of all kinds, even the weakest (which tend to be the most shorted). When the price of these shorted stocks eventually starts rising, short-sellers throw in the towel by buying back the stock to liquidate their short position.
This simply exacerbates the move higher and could end up resulting in some major squeezes, like we’re seeing in GME now. The stock ripped from about $4/share last summer to over $100 today as I write this. It’s a rather extreme example but it shows just how powerful of a tailwind this can be.
The big takeaway here for us is that shorting is simply not a tool we’re deploying in this environment.
Even the weakest sectors and regions are still being bought in what can only be seen as risk appetite.
So let’s move now to our Sector ETF table.