For those new to the exercise, we take a chart of interest and eliminate the x and y-axes and and all labels eliminated to minimize bias. The chart can be any security in any asset class on any timeframe on an absolute or relative basis. It can even be inverted or a custom index.
The point here is to not guess what it is, but instead to think about what you would do right now.Buy,Sell, or Do Nothing?
I couldn't help but see many of the same folks who were happy about Trump's "Trade Deal" tweets when they drove the stock market higher complaining as his tweets sent Futures lower on Sunday night and again today after the bell.
I thought this might be a good time to remind ourselves of something.
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
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.
Excuse my play on words in the title, but I wanted to make the point that at 13% of the Nifty 500, the Fast Moving Consumer Goods Index is a big part of the bull case for Indian stocks.
We've talked about weak participation in this sector and since then it's deteriorated further as opposed to getting better.
While we wait to see whether or not this retest of all-time highs is a successful one, we want to define our risk on the long side in individual names that continue to lead the market higher.
One subsector that remains a consistent source of these setups is Software.
Below is a chart of Software relative to the Technology Sector overall, finding support right where it needed to at our previous price target. Whether prices can get back to their year-to-date highs will be an important tell, but for now the uptrend in this ratio remains strongly intact.
