One important part of the bull case for stocks in the US has been the leadership we've seen from small and mid-caps, growth areas of the market, and high beta stocks, however, we're starting to see some short-term deterioration in these leaders on an absolute and relative basis. Today I want to quickly look at the relationship between high beta stocks and their low volatility counterparts.
In 2017 we saw an acceleration of the decade-long trend of growth outperforming value, and after further deterioration in this ratio to start the year, the weight of the evidence is suggesting a bottom may be in.
Every time the stock market rallies over any significant period, we're bound to see the "most shorted stocks" chart come out of the woodwork with an ominous caption like "presented without comment" or "this is the top". Besides the fact that presented without comment is a comment in and of itself, the presenter very rarely tells us the methodology behind the chart's construction, leaving us with more questions than answers.
Dollar strength has wreaked havoc on the group of ETFs that many people use to gain exposure to global equity markets. One downside of many of these ETFs is that they own the assets of the country they represent in their local currency, and since the vehicle is unhedged, changes in the exchange rate play an important role in their pricing. The Dollar Index has rallied roughly 8% since its February lows, and more dramatically against many emerging and developed market currencies not represented in the Dollar Index, which has exacerbated many of the price declines we've seen in this group of stocks.
In early April I tweeted about AMD's potential breakdown from its 15-month bull-flag and its potential implications for the stock. In hindsight I'm glad I did because it's great to have this real-time example of my mindset, and the mindset of others in the marketplace, as the pattern played out. It was also a great opportunity to get constructive feedback in the comments section from many of the bulls at the time. Now that I've used my one joke per post allowance, let's move onto how the stock has performed since.
If you've been reading this blog you've probably noticed a lot of posts about the areas of the market showing relative strength, like Technology and Consumer Discretionary, however, one industry not getting as much attention is Airlines. The reason for that is simple; the Dow Jones Transportation Index is sitting roughly 3% off all-time highs within a strong uptrend, however, Airlines continue to struggle to gain any altitude, sitting at 52-week lows on an absolute basis and crashing on a relative basis.
Monday afternoon I was down in San Francisco, so I went by the Bloomberg West studios to do a quick hit with Catherine Murray. She asked me about the S&P500, Technology, Financials and the underperformance of Consumer Staples. We also discussed sector rotation and Crude Oil during the segment.
Despite the higher highs and higher lows in the major indices, all-time highs in riskier assets such as micro and small-cap stocks, and fresh breakouts in leading sectors like Technology and Consumer Discretionary, there continues to be a subset of market participants who fight this rally.
It's hard for me to make a bearish case for stocks with the Consumer Discretionary sector breaking out on both an absolute and relative basis. In other words, the Consumer Discretionary sector index fund is not only coming out of a 5-month base to new all-time highs, but relative to the S&P500, Discretionaries are coming out of a 30-month base to make new all-time relative highs. This is tough to ignore.
In early May, I pointed out that the Consumer Discretionary vs Consumer Staples ratio making new all-time highs was sector rotation suggesting higher stock prices in general. Since then the S&P500 is up 5.5%, the Small-cap Russell2000 is up 7.6% and the Nasdaq100 is up 7.8%. This sort of behavior is consistent with an environment where the riskier, more speculative, much higher beta Discretionary stocks are outperforming the safer, less risky and much lower beta Staples.
The broader market has resolved its range to the upside led by several groups, among them Consumer Discretionary, which is hitting all-time highs on an absolute basis and also relative to the Consumer Staples sector. Within that group, the Restaurant industry continues to deliver strong returns. An example is Texas Roadhouse up 20% YTD on top of an already massive ~ 1300% gain from its 2008 lows.
Click on chart to enlarge view.
To show how broad-based this rally's been, I want to highlight two stocks on the opposite ends of the spectrum, Denny's, the breakfast chain, and RCI Hospitality Holdings, the owner/operator of nightclubs.
I don't think many people are prepared for a 60% rip in shares of Tesla. I see the headlines coming through written by people who have never traded a stock in their lives. I see the pessimism and skepticism. Most importantly, I also see that a third of the float is short the stock. So forget what people are saying, look at what people are doing!
Those of you who know me or have been reading the blog for a while understand the power of the failed move, or the "whipsaw" as we like to call it. The old saying is that from failed moves, come fast moves in the opposite direction. I believe this scenario is precisely what we have on our hands today in shares of Tesla. In my opinion, the risk here is much higher and the higher probability outcome is that these shorts get squeezed very hard.
Today's mystery chart reveal post highlighted the potential opportunity in the Homebuilder ETF ($XHB) as it sits at an important inflection point within a longer-term uptrend. In the post I highlighted that although there is mixed performance among the components, the reward/risk is still skewed in favor of the bulls at current levels. As a follow-on to that, this post will be highlighting some of the best and worst stocks in the sector along with our risk management levels and targets for each.
