Key takeaway: Record highs in equity indexes buoy investor sentiment that has remained optimistic without a significant challenge over the past year. Bulls ticked higher across our sentiment indicators last week, yet we still see evidence that risk appetite is turning (NAAIM Exposure Index, NASDAQ trading volume, overall levels of options activity). These new highs and levels of optimism must contend with the undercurrents of lackluster breadth measures and an absence of pessimism. Risks lie just beneath the surface. This raises the possibility of a more complete sentiment unwind when risks are realized and prices begin to falter.
Sentiment Report Chart of the Week: Know What They Say, Watch What They Do
The latest All Star Charts "Follow The Flow" report is out, and once again there's a great looking opportunity there that caught my eye.
In a nutshell, the Flow report is looking at "a list of stocks that large financial institutions are putting big money behind (via options)… 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."
The opportunity setting up now is in a stock in a sexy sector that looks like it's ready to resume the rocketship ride it embarked on in 2020.
Just because there's no divergence in the A/D line doesn't mean the market can't correct. But if there's a divergence in the A/D line, you better pay attention.
That's what's happening here.
Remember, at first it was just the Nasdaq Advance-Decline line diverging. This one peaked back in early February. Notice how we had a divergence before the COVID crash as well:
The market environment directed our focal point toward the Dollar. And now that it appears risk is coming off the table, we’re shifting our focus to the Yen.
Usually, when we talk about risk-on/risk-off behavior and the Yen, the AUD/JPY is at the center.
This is one of our favorite bottoms-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 only.
There are stocks going up and there are stocks that are not going up.
What you're not really seeing is many stocks going down.
That's probably the best way to describe this market.
We've outlined our long positions, particularly those that have been showing relative strength and positive momentum. Those areas are working.
But most stocks are not.
You can see the difference in the Value Line indexes, when we compare them to the S&P500. Think of these more of the "Median" stock:
You can see the same thing in other areas we look for confirmation of risk appetite. Both the Aussie/Yen and the High Beta / Low Volatility ratios are not confirming the new highs in S&Ps:
These are the registration details for our Live Monthly Candlestick Strategy Session for Premium Members of All Star Charts.
This month’s Video Conference Call will be held on Thursday July 6th @ 6PM ET. As always, if you cannot make the call live, the video and slides will be archived and published here along with every other live call since 2015.
Once again this month, I’m going to share info on positions that were closed in the month of June. As a reminder, our exit plans are always laid out ahead of time in each trade idea we publish. In every case, the exits mentioned below were all in accordance with the plans as laid out.
As we head towards July expiration, we have six open positions remaining with expiring July options.
This is a quick follow-up to discuss a hot stock from a leading industry group... And of course, it's presently offering us a skewed risk/reward. At the end of the day, that's all we're really looking for!
On the surface, this company is just an old LED light and radio-frequency device maker...
But, that's not the whole story.
They actually manufacture and sell some of the most important inputs and materials for a variety of burgeoning growth industries.
While a seemingly favorable fundamental story is always nice to have as a potential catalyst, it is never enough. For us, it's all about price.
Speaking of which, let's dive in and see what the charts are telling us.
