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.
As the market has been sending mixed signals since July, we’re seeking information from our risk appetite indicators to try to gauge the next move.
One of our favorite ways to measure risk appetite is to compare the consumer discretionary sector with consumer staples. This tells us whether market participants are positioning themselves defensively, or embracing risk.
Discretionary stocks include automobiles, retailers, and homebuilders, among other things. Theoretically, we’re talking about products and services consumers buy with their discretionary incomes.
Meanwhile, staples are what "consumers" will buy regardless of how bad economic conditions get… things like food, toothpaste, cigarettes, etc.
When this ratio points higher, it illustrates a healthy degree of risk-seeking behavior among investors. Alternatively, when it points downwards, it speaks to a defensive tone and typically occurs during bear markets.
From the Desk of Steve Strazza and Alfonso Depablos
With investors and executives scrambling to figure out what the geopolitical events of the weekend mean for their portfolios and companies, all was silent on the insider filings front.
There were no Form 4s, Form 13s, or political reports that meet our materiality threshold.
Many investors think it's not coming and that the market is going to crash instead.
In fact, CTAs have never been this short. The last few times they were anywhere near this bearish, stocks went on to have some of the greatest rallies in history. I remember them well:
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 Steve Strazza @sstrazza and Alfonso Depablos @Alfcharts
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.
