From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Bonds are off to their worst start in the past 40 years, possibly ever!
It’s not even close.
As we near the end of Q2, the US Treasury Bond ETF $TLT is down almost 22% year to date. And that’s after its recent bounce higher.
There's been nowhere to hide, as these traditional safe-haven assets have been an absolute dumpster fire along with stocks.
But we’re starting to see some of those flames extinguished.
Some of the worst-performing stocks tipped the bond market’s hand ahead of the recent lows. That’s right: Those Big Tech names and Chinese internet stocks stopped going down months ago and now bonds are following higher.
Believe it or not, bonds and high-duration equities have a lot in common. The Growth $IWF versus Value $IWD ratio really tells the story.
Let’s take a look.
Here’s an overlay chart of the TLT and the IWF/IWD ratio:
Monday night we held our June Monthly Conference Call, which Premium Members can access and rewatch here.
In this post, we’ll do our best to summarize it by highlighting five of the most important charts and/or themes we covered, along with commentary on each.
As many of you know, something we've been working on internally is using various bottom-up tools and scans to complement our top-down approach. It's really been working for us!
One way we're doing this is by identifying the strongest growth stocks as they climb the market-cap ladder from small- to mid- to large- and, ultimately, to mega-cap status (over $200B).
Once they graduate from small-cap to mid-cap status (over $2B), they come on our radar. Likewise, when they surpass the roughly $30B mark, they roll off our list.
But the scan doesn't just end there.
We only want to look at the strongest growth industries in the market, as that is typically where these potential 50-baggers come from.
It's not just retail. Some of the most sophisticated crypto funds on the planet are blowing up. Lives are getting destroyed.
But here's a quick reminder: The best trades come when others are forced to exit and are at their lowest points.
Is it a nice way to make a living?
No. But you have to deal with it. Otherwise, you end up being on the wrong side.
The ETF providers in their infinite wisdom seem to be feeding on this sentiment, with the first short Bitcoin ETF being launched in the US this week. This feels awfully reminiscent of October, when the first Bitcoin futures ETF was launched.
There is probably a certain segment of the investing population that would look askance at me if I mentioned we're seeing "strength in China." They wouldn't believe that is possible. According to the news media they consume, China is "a mess." Perhaps that is true? But we only follow price here at our shop, and price is beginning to tell a different story.
Today's trade idea comes from TWO seemingly unlikely places: China and Internet! (what??????)
And when you see this chart of the Chinese Internet ETF $KWEB, you'll see why:
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Whatever we’re looking for, the market has it.
If we’re searching for large topping patterns and strong downtrends, there’s plenty to go around, especially in the bond and stock markets right now.
Some people love taking the short side, feeding on the doom and gloom narratives accompanying the selling pressure.
But if that’s not your cup of tea, plenty of markets are trending higher. If you’re more interested in assets making new highs and like buying high and selling higher, look no further than the currency market.
When it comes to forex crosses these days, it’s simple.
All we have to do is put the US dollar in the numerator or place the Japanese yen in the denominator, and we get big bases that have either broken out or are on the verge of breaking out.
It’s that easy.
We’ve highlighted the yen in recent posts, so today we’ll switch gears and focus on a couple USD crosses from northern Europe.
We’ve had some great trades come out of this small-cap-focused column since we launched it back in 2020 and started rotating it with our flagship bottom-up scan, Under the Hood.
For the first year or so, we focused only on Russell 2000 stocks with a market cap between $1 and $2B.
That was fun, but we wanted to branch out a bit and allow some new stocks to find their way onto our list.
We expanded our universe to include some mid-caps.
To make the cut for our Minor Leaguers list, a company must have a market cap between $1 and $4B.
This is one of our favorite bottom-up scans: Follow the Flow. In this note, we simply create a universe of stocks that experienced the most unusual options activity — either bullish or bearish, but not both.
We utilize options experts, both internally and through our partnership with The TradeXchange. Then, we dig through the level 2 details and do all the work upfront for our clients.
Our goal is to isolate only those options market splashes that represent levered and high-conviction, directional bets.
We also weed out hedging activity and ensure there are no offsetting trades that either neutralize or cap the risk on these unusual options trades.
We're going on over 16 months of this so far, and counting....
Remember, stocks peaked in February of 2021, meaning that was the best things were for stocks during this cycle. And it's been a slow deterioration ever since.
The first stocks to peak are what we refer to as the "Culprits". Every bear market has that group that you can point to as the leaders to the downside.
We came into 2022 with a close eye on those Culprits (see here) and we've continued to monitor their declines.
If you haven't been following along, those groups include Chinese Internet, Biotechnology, the IPO stocks, and of course Cathie Wood's ARKK Funds, who have become the poster child for this latest bubble.
But a funny thing happened 6 weeks ago - they all stopped going down.
And the leader to the upside has been Chinese Internet (yes you read that right, I had to run the numbers multiple times to believe it myself).
From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
One of the most important risk ratios and easily the biggest snooze fest from the past year is finally starting to move.
That’s right – after going nowhere for more than a year, the Copper/Gold ratio is making a directional move! And believe it or not, it’s resolving in the opposite direction of interest rates.
Instead of following rates higher, Copper/Gold is rolling over to the downside and raising questions regarding risk appetite and overall market health.
We can’t emphasize the importance of these developments enough. We’ve been awaiting resolutions of these ranges since early last year, and it’s finally happening.
Let’s talk about it.
Here’s an overlay chart of the Copper/Gold ratio and Copper futures:
