From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
When it comes to the bond market, credit spreads are always top of mind. They provide critical information regarding the liquidity and stress of the largest markets in the world.
While most of us aren’t full-time bond traders, in many cases we turn to these assets to offset the risk associated with the equity side of our portfolios. That’s fine.
Earlier in the month, we noted that these crucial spreads were widening to their highest level since late 2020 as the high-yield bond versus Treasury ratio $HYG/$IEI hit new 52-week lows.
It’s no coincidence that the major stock market averages fell to their lowest level in over a year as this was happening.
This is why we pay close attention to credit spreads. They give us information about the health of other risk assets.
For this week's trade, we're buying a $CVX October 180/200 Bull Call Spread for approximately $6.50 here. This means we're long the 180 calls and short an equal amount of the 200 calls for a net debit.
Get the full details, risk management procedures and targets for this trade here:
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.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The US dollar is front and center as risk assets hang in the balance.
Earlier in the month, we placed the Australian and Canadian dollars on breakdown alert as they completed major topping patterns.
US dollar strength was expanding at the time, and the AUD and CAD were the last dominos to fall.
Or so it seemed.
What started as strong downside resolutions for these top commodity currencies quickly turned into potential failed breakdowns.
Now that the most resilient currencies are snapping back against King Dollar, it's compromising the broad US dollar rally and could usher in a more favorable environment for risk assets.
Let’s discuss what it means for stocks and commodities if these failed breakdowns resolve higher.
Here’s a chart highlighting the recent action in the Canadian dollar and Australian dollar futures:
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’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.
We recently decided to expand our universe to include some mid-caps…
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.
The way we did this is simple…
To make the cut for our new Minor Leaguers list, a company must have a market cap between $1 and $4B.
The average stock listed on the NYSE is down over 34% off its highs.
The new 52-week highs list peaked in February of last year - that was over 15 months ago!
We've now seen more stocks hitting new lows than new highs for the most consecutive weeks since the Great Financial Crisis.
The Technology, Communications and Consumer Discretionary sectors combined make up almost half of the stocks in the entire S&P500. They're each now down 26%, 33% and 35%, respectively.
In fact, almost half the stocks on the Nasdaq have seen their prices get cut in half.
And people keep asking me if we're going into a bear market?
What the hell do you call that?
If you define all that as a bull market, then I think you need to check yourself into a mental hospital.
However, during that time, commodities continued to rip higher.
Now that the rally in raw materials is reaching significant areas of overhead supply, it would make sense for this leadership space to follow stocks and enter a corrective period.
In other words, the uptrend in commodities that has persisted since 2020 is likely to take a breather and turn into a sideways trend.
