Welcome back to Under the Hood, where we'll cover all the action for the week ended November 14, 2022. This report is published bi-weekly and rotated with our The Minor Leaguers.
What we do here is analyze the most popular stocks during the week and find opportunities to either join in and ride these momentum names higher, or fade the crowd and bet against them.
We use a variety of sources to generate the list of most popular names.
There are so many new data sources available that all we need to do is organize and curate them in a way that shows us exactly what we want: a list of stocks that are seeing an unusual increase in investor interest.
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.
Welcome to Under the Hood, where we'll cover all the action for the week ended October 28, 2022. This report is published bi-weekly and rotated with our The Minor Leaguers.
What we do here is analyze the most popular stocks during the week and find opportunities to either join in and ride these momentum names higher, or fade the crowd and bet against them.
We use a variety of sources to generate the list of most popular names.
There are so many new data sources available that all we need to do is organize and curate them in a way that shows us exactly what we want: a list of stocks that are seeing an unusual increase in investor interest.
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.
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Defense wins championships.
It’s important to remind ourselves of this as risk continues to come off the table.
The largest stocks in the world are losing critical support levels, and even the leaders are coming under pressure. Bonds are catching a defensive bid, credit spreads are as wide as they’ve been in years, and investors are fleeing to the dollar for safety.
Meanwhile, the classic risk barometer – the AUD/JPY – is breaking to fresh lows.
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Sideways has been the theme for most risk assets since they peaked in the first half of last year. Markets have become increasingly messy in the time since.
If we’re talking about US equities, the market is as bifurcated as it’s been in years.
All we mean by this is that depending on what group a stock is in, it could be in a nice uptrend, but it could also be in an ugly downtrend. Stocks and other risk assets are literally moving in opposite directions these days, and doing so with some serious momentum.
At the index level, you can see this split market reflected by trendless ranges.
When we look to our risk-appetite ratios and indicators for information, we’re not getting much as the vast majority are still stuck in the same ranges they’ve been in for the better part of 12-months.
So, risk assets are a mess and most of our risk indicators are also a mess. Makes sense, right?
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
There’s been very little happening on our risk checklist, as evidence for risk appetite remains split between bulls and bears.
The last time we discussed it was in our Q1 Playbook. While the list hasn’t picked a decisive direction yet, the fact that it's such a mixed bag is information in and of itself.
It's been an excellent roadmap for us in recent months, because just like the market -- our risk checklist has also been a mess.
Let's take a look at where we stand and discuss some of the more recent developments.
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
In April 2020, crude oil traded below zero and marked the perfect capitulation event for a number of trends.
Around the very same time, both commodities and stocks bottomed and kicked off major rallies.
Until recently, commodities had underperformed stocks for about a decade. To make matters worse, they were moving lower on an absolute basis for most of that time as well.
Not only have commodities started to trend higher on an absolute basis again. They're also undergoing a reversal in their relative trend with stocks and other alternatives.
We’ve been clear about our bullish position as we’ve discussed the potential for a new commodity supercycle for over a year.
Now, we want to take that thesis one step further as the evidence is building in favor of commodities experiencing a sustained period of outperformance relative to stocks.
To best take advantage of this trend, we want to be overweight commodities and commodity-related stocks.
From the desk of Steve Strazza @Sstrazza and Grant Hawkridge @granthawkridge
One of the most important themes these days is the rotation between growth and value stocks. Groups like energy and financials have been breaking to new highs while growth and tech indexes have come under serious pressure.
So far, 2022 has been a true tale of two markets.
While cyclicals and value stocks appear to be gearing up for a momentous year, it looks like the party is finally coming to an end for the growth trade.
We want to lean on the value-heavy leadership groups for long opportunities in 2022. As for growth, we think it's likely to remain messy as interest rates continue to rise.
When we look beneath the surface at growth and value stocks right now, our breadth data is confirming the action we’re seeing at the sector level.
Let’s dive in and discuss...
Here's one way to visualize the opposing paths of large-cap value and large-cap growth right now. This indicator shows us the percentage of stocks above their 50-day moving averages for each of these indexes:
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Outside of the large-cap averages in the US, most stocks have been stuck in sideways trends for much of 2021. We’ve seen breakouts fail in both directions over the past two months, as sloppy price action continues to govern the broader market.
As we discussed in our last intermarket post, this range-bound action has not just been the case for stocks on an absolute basis. We’re seeing the same thing from commodities, cryptocurrencies, and even our risk-appetite ratios. Risk assets have simply been a mess.
Let's take a look at one of our favorite risk-appetite ratios, as there's been an important development in the discretionary versus staples relationship.
Here is large-cap consumer discretionary $XLY versus consumer staples $XLP:
The percentage of new highs and other internal indicators spiked to historic extremes in 2020, indicating that we were in the early innings of a new bull cycle.
Sideways and choppy price behavior has been the theme this year. We haven’t come close to the high-water marks achieved by our breadth indicators last year, so, naturally, there are divergences.
Indeed, these breadth divergences are to be expected. Market internals tend to peak early in a cycle. What bulls don't want to see is a meaningful downside expansion in breadth.
During the recent selling pressure, we experienced some of the highest readings in new lows since the COVID crash.
