The S&P 500 and the other US large-cap indexes have continued to grind to new highs all year, completely unphased by any of the deterioration in breadth beneath the surface.
But, when looking at the global stage, things are different…
In this post, we’ll look at the current state of market breadth around the globe and discuss whether internals are supporting the new highs in many international indexes.
It's always a worrying sign when price is making new highs at the index level with a lack of confirmation from internals. But that simply isn’t the case for ex-US equities these days.
In fact, it’s just the opposite, as we’re seeing our breadth metrics support and confirm the recent price action on a global scale.
Here we’re looking at the percentage of developed and emerging markets above their 50-day moving averages:
From the desk of Steve Strazza @sstrazza and Louis Sykes @haumicharts
Welcome to our latest RPP Report, where we publish return tables for various 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 to profit in the weeks and months ahead.
We consider this our weekly state of the union address as we break down and reiterate both our tactical and structural outlook on various asset classes and discuss the most important themes and developments currently playing out in markets all around the world.
In our last report, we discussed all the whipsaws we had been witnessing in recent weeks and noted that the next major piece of information would be the velocity of the reactions these charts made in the opposite direction.
What we do here is take a chart that’s captured our attention, and remove the x and y-axes as well as any other labels that could help identify it.
This chart can be any security, in any asset class, on any timeframe. Sometimes, it’s an absolute price chart. Other times, it’s on a relative basis.
It might be a ratio, a custom index, or maybe the price is inverted. It could be all three!
The point is, when we aren’t able to recognize what’s in front of us, we put aside any biases we may have and scrutinize the price behavior objectively.
While you can try to guess the chart, the point is to make a decision…
So let us know what it is… Buy, Sell, or Do Nothing?
"I like an $AMZN February 3800/3900 Bull Call Spread for an approximately $29.00 – $30.00 debit. This means we’ll be long the 3800 strike call and short an equal amount of 3900 strike calls."
To learn more about the trade and the thinking behind it, click below to watch a replay of the Live Stream.
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.
Key Takeaway: Investors continue to favor stocks as money relentlessly pours into equity ETFs. It’s no wonder, given that the main stock indexes are printing new record highs. Yet, a depressed risk appetite and an unsupportive breadth backdrop accompany the persistent push higher in equities. Though these suspect undercurrents aren’t apparent at the index level, we see signs that short-term attitudes are shifting. Bears are on the rise, with the average of the II and AAII bears trending higher. However, pessimism remains relatively mooted and optimism is still elevated when viewed through either a cyclical or strategic lens. The current environment suggests there is more risk than opportunity for equities from a sentiment perspective.
On this episode of the podcast, I sit down with Ed Clissold, Chief U.S. Strategist at Ned Davis Research.
I've been a big fan of Ed's work for a long time, not to mention Ned Davis is one of my personal heroes.
The work they do over there has been inspiring to me throughout my entire career. So as you can imagine, it was so fun and such a pleasure to chat with Ed.
We talk about Market Breadth, Sector Trends, Momentum and Seasonality.
If you have any exposure whatsoever in the market, or even thinking about putting on exposure, then this is the episode for you!
During our team's weekly strategy meeting this morning, we were chatting about how the retail sector has just been hanging in there. And don't we know it -- we've had a long puts play in $XRT (the retailers ETF) since late July that hasn't gone anywhere for us. Our thinking was this sector would be the one to lead us down if the markets wanted to trade down.
Instead, it's been hanging tough and JC remarked that it might act as "a big trampoline" for some of the notable names in the space if we start moving higher.
And of course, the 800-pound gorilla in the space is Amazon $AMZN, so if we're going to play a move higher in retailers, it makes sense to start here.
Of the four trade setups we identified--EUR/USD, GBP/USD, AUD/USD, and NZD/USD--the Aussie was the only one that worked.
The fact that many of those trades failed or, more specifically, were never even triggered at all, is information!
Fast forward to today and we're looking at a failed breakout in the US Dollar Index that's been confirmed by strong downside follow-through since last week. Now, it’s time to flip the book long on some of these trades to express our thesis of further USD weakness, at least over the near term.
One trade setup that stands out due to its asymmetric risk-reward profile at current levels is the NZD/USD.
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. What remains is a list of stocks that large financial institutions are putting big money behind… and they’re doing so for one reason only: because they think the stock is about to move in their direction and make them a pretty penny.
We've already had some great trades come out of this small-cap-focused column since we launched it late last year and started rotating it with our flagship bottoms-up scan, "Under The Hood."
To make the cut for our Minor Leagues list, a company must have a market cap between $1 and $2B. There are also price and liquidity filters. Then, we simply sort by proximity to new highs in order to focus on the best players.
The goal is to catch the strongest names while they're small and still have serious upside potential. If any of these stocks ever climbs the ranks to the big leagues, the returns could be huge. We're looking at 5-10x moves just to break into large-cap land!
Let's dive into this week's report and see what's happening in some of the hottest stocks in the Minor Leagues.
"JC, are there any books you recommend for someone trying to learn more about Technical Analysis?"
The answer is yes. Of course.
The thing is, back in the day when I was studying for my CMT exams, there wasn't a well-defined curriculum like there is today. This was back in 2006. They would just give us a list of books to read and wish us the best of luck!
I really enjoyed that, actually. To this day I still tell people to go through the curriculum like they ask you to, but then go back and read the books too!
Now, if I had to do it all over again today, this is what I would do:
