From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Consolidation and range-bound action have dominated the currency market since late last year.
While commodities and cyclical stocks -- especially energy -- continue to catch a bid, commodity-centric currencies like the Australian and Canadian dollars fail to show any definitive signs of strength.
At the same time, the US dollar isn’t doing much either, as the US Dollar Index $DXY has been chopping sideways for several months.
Long story short, indecision is the overarching theme for forex markets at the moment.
One forex pair that does an excellent job of illustrating the trendless nature of these markets is the AUD/JPY.
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.
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.
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.
We recently decided to expand our universe to include some mid-caps…
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.
The way we did this is simple…
To make the cut for our new Minor Leaguers list, a company must have a market cap between $1 and $4B.
In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
Finding Value Among Small Caps
We've been pounding the table on the importance of the 2021 lows for small caps. After consolidating for almost a year, sellers took control and knocked prices beneath this critical support zone last month. Until this level is reclaimed, risk is to the downside and we don’t want to own the Russell 2000. However, we can own small cap value stocks as they continue to show impressive relative strength. This is illustrated by the Russell 2000 Value ETF (IWN) holding above its former lows -- unlike its peer indexes in the lower panes. This speaks to risk-seeking behavior and is another example of the cyclical leadership theme that is playing out across various markets. And just like we don’t want to be long the indexes that are beneath their 2021 lows, when it comes to individual stocks, we want to focus on those that are resolving their ranges higher for long opportunities.
Check out this week's Momentum Report, our weekly summation of all the major indexes at a Macro, International, Sector, and Industry Group level.
By analyzing the short-term data in these reports, we get a more tactical view of the current state of markets. This information then helps us put near-term developments into the big picture context and provides insights regarding the structural trends at play.
Let's jump right into it with some of the major takeaways from this week's report:
* ASC Plus Members can access the Momentum Report by clicking the link at the bottom of this post.
Our Hall of Famers list is composed of the 150 largest US-based stocks.
These stocks range from the mega-cap growth behemoths like Apple and Microsoft – with market caps in excess of $2T – to some of the new-age large-cap disruptors such as Moderna, Square, and Snap.
It has all the big names and more.
It doesn’t include ADRs or any stock not domiciled in the US. But don’t worry; we developed a separate universe for that which you can check out here.
The Hall of Famers is simple.
We take our list of 150 names and then apply our technical filters so the strongest stocks with the most momentum rise to the top.
Let’s dive right in and check out what these big boys are up to.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The middle of the curve is catching higher as the US 10-year Treasury yield pushes toward its next milestone at 2.00%.
Now that we’re starting to see some follow-through to the upside, it raises the question…
Are these new highs in the 10-year sustainable?
With inflation expectations just off their highs, short-term rates surging in the US, and yields ripping higher across the globe, we think the answer is a resounding yes!
A few weeks ago, we discussed how global yields -- particularly those in developed Europe -- were confirming the new highs for US yields.
Since then, we've only seen this trend accelerate. With central banks turning increasingly hawkish, rates continue to break out to new highs around the world.
Today, we're going to dive further into this theme by taking a look at a handful of benchmark rates outside the US.
When investing in the stock market, we always want to approach it as a market of stocks.
Regardless of the environment, there are always stocks showing leadership and trending higher.
We may have to look harder to identify them depending on current market conditions… but there are always stocks that are going up.
The same can be said for weak stocks. Regardless of the environment, there are always stocks that are going down, too.
We already have multiple scans focusing on stocks making all-time highs, such as Hall of Famers, Minor Leaguers, and the 2 to 100 Club. We filter these universes for stocks that are exhibiting the best momentum and relative strength characteristics.
Clearly, we spend a lot of time identifying and writing about leading stocks every week, via multiple reports.
But, now, we’re also highlighting lagging stocks on a recurring basis.
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 Steven Strazza @Sstrazza and Ian Culley @IanCulley
The US dollar can’t catch a bid.
Since briefly reclaiming its November highs last month, it’s been nothing but down and to the right for the US Dollar Index $DXY.
Many global currencies have reacted by catching higher – especially the euro. But commodity-centric currencies – like the Canadian and Australian dollars – have had a more muted reaction. We think that’s likely to change in the coming weeks and months.
With interest rates on the rise around the world and crude oil prices pushing above 90, we think it’s just a matter of time before we begin to see some real strength from these currencies – especially if we see a sustained downtrend in the USD.
Today we’re going to highlight one of these forex pairs, as we think it’s poised for a major move. Let’s talk about the USD/CAD.
