Register here for our live monthly conference call for Premium Members of All Star Charts India.
January's Strategy Session will be held on Tuesday, January 4th at 7 PM IST. As always, if you cannot make the call live, the video and slides will be archived and published here along with all of our past conference calls.
On Monday morning, if you were on twitter or watching the teevee you'd have assumed the stock market was about to get cut in half and the pitchforks were going to be lining up outside the Federal Reserve building in Washington, D.C.
Then, the market did what the market does and now here we are with the S&P 500 looking like it wants to make another run at all-time highs.
Forget about market volatility --- how about trader's emotional volatility?!
With this in mind, there is still some nice options premium being priced into individual names that offer us some unique tactical opportunities for some quick gains.
One nice thing about recent stock market volatility is that there are some bullish setups we can take advantage of with some clearly defined nearby risk levels, which give us entries with solid reward-to-risk scenarios.
And of course, in a theme we've been repeating over the past week, this volatility is also helping us more easily find where the hidden relative strength is.
So let's dive right into an idea that was surfaced in the recent Hall of Famers report.
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Outside of the large-cap averages in the US, most stocks have been stuck in sideways trends for much of 2021. We’ve seen breakouts fail in both directions over the past two months, as sloppy price action continues to govern the broader market.
As we discussed in our last intermarket post, this range-bound action has not just been the case for stocks on an absolute basis. We’re seeing the same thing from commodities, cryptocurrencies, and even our risk-appetite ratios. Risk assets have simply been a mess.
Let's take a look at one of our favorite risk-appetite ratios, as there's been an important development in the discretionary versus staples relationship.
Here is large-cap consumer discretionary $XLY versus consumer staples $XLP:
The wild ride in the stock markets this week is nothing if not revealing to us where the relative strength is hidden!
There's always a silver lining to volatility. The vulnerable stocks get exposed, the weak hands get shaken out, and what we're often left with is a pretty clear picture of where the strength is and which names are likely to lead us higher when things calm back down.
During this morning's internal strategy session with the All Star Charts team, one theme we hit upon was that many of the stocks we want to be long have already had big runs making it irresponsible to get long here, and all the stocks we want to get short have already had big recent legs down and we don't want to chase those either!
I mean, to give you an idea, just look at the charts of healthcare ETF $XLV which is made up of many small-cap names, and $IWM -- the Russell 2000 small-cap index -- both are going in completely opposite directions! That pretty much sums up the predicament we find ourselves in right now.
It's a messy market out there!
So, naturally, we should look at companies that manage risk as their business!
With the S&P 500 wrestling with the 4700 level, I've been turning my eyes to some of our more favorable bullish setups.
On Friday, the ASC team published their latest International Hall of Famers List report. This list is composed of the 50 largest US-listed international stocks or ADRs. The team takes the 50 largest names each week and then applies technical filters in a way that the strongest stocks with the most momentum rise to the top.
The name from this list that caught my attention just saw a dramatic collapse in options volatility, making call options cheaper. And with the stock above the trigger level, it's time for us to get involved.
There is always a silver lining to slippery stock markets like the one we experienced over the last couple of weeks: Stocks that are overdue for pullbacks get them -- and sometimes hard. Meanwhile, the stocks where there is strong institutional support and/or no real bearish case to take profits reveal themselves through relative strength.
The stocks that refuse to budge during broad market selloffs are the ones bulls need to pay attention to. Because by the time the markets signal "all clear!" (do they ever?) it's usually already too late to get in. You missed it. It ran without you.
With this in mind, one of the stocks in the recent 2-to-100 Club report caught my eye.
The froth has definitely come off the $VIX spike over the past week. Does this mean we're all clear? Well, no. Not necessarily and not yet.
But it does give us a little bit of confidence that some short-term lows can be leaned against as good risk management levels when taking long directional bets.
There's still some juicy premium to be sold when looking at some sector ETFs and that brings me to the Biotech sector ETF $XBI.
Options premiums still remain elevated across the board and therefore I continue looking for delta-neutral premium-selling strategies to implement.
We have to take whatever the market is offering. The recent downward price action has created a bunch of resistance levels to lean against on the upside. So I want instruments that also have clearly defined support levels and high premiums for us to sell.
While volatility remains elevated, I remain on the hunt for appropriate vehicles to sell premium in.
We sold premium in IWM earlier this week. Today, I'm going to drill in a little deeper into sector ETFs that are displaying the highest relative implied volatilities. This search leads me to the finance sector.
