From the desk of Steve Strazza @Sstrazza

New Mystery Chart!

For those new to the exercise, we take a chart of interest and remove the x/y-axes and any other labels that would help identify it. The chart can be any security in any asset class on any timeframe on an absolute or relative basis. Maybe it’s a custom index or inverted, who knows!

We do all this to put aside the biases we have associated with this specific security/the market and come to a conclusion based solely on price.

You can guess what it is if you must, but the real value comes from sharing what you would do right now. Buy, Sell, or Do Nothing?

From the desk of Steve Strazza @Sstrazza

For the week ended Friday, April 24, 2020:

Every weekend we publish performance tables for a variety of different asset classes and categories along with commentary on each.

This week we want to highlight the continued divergence between Energy stocks and Oil using our Sector and Industry ETF and Commodity tables.

First, let's look at some of the longer-term leaders. Biotechs (IBB) just broke out to fresh multi-year highs and are one of the top performers on our Industry ETF list across all timeframes.

Aside from Gold Miners (GDX), they are the only industry on our expanded list of over 50 ETFs already back at fresh 52-week highs. Definitely some relative strength worth paying attention to in these areas.

Be sure to read our recent post on Gold Miners.

From the desk of Steve Strazza @Sstrazza

We have been writing a lot about risk-appetite lately as we're constantly trying to gauge the "animal spirits" at work in the markets.  Right now we're seeing a lack of participation from risk-assets such as Small-Caps, Commodities, and the more cyclical sectors as well as a risk-off theme in many of our intermarket ratios.

We've covered the US plenty already, so this post will focus on what we're seeing from risk-assets in Equity Markets abroad.

This week's Mystery Chart was an inverted chart of the Frontier Markets ETF (FM). Thanks to everyone for participating. You were pretty much ALL buyers this week, which means you were actually selling Frontier Markets against their prior all-time lows.

From the desk of Steve Strazza @Sstrazza

Yesterday I wrote a post about deteriorating market internals. I discussed breadth divergences as well as the lack of confirmation of the S&P 500's recent highs from many important sectors and indexes.

In this post, we're going to focus specifically on the Large-Cap Sector SPDRs that failed to make higher highs and are showing early signs of cracking. To no surprise, these are some of the most cyclical areas of the market including Industrials (XLI), Financials (XLF), Materials (XLB), and Energy (XLE).

This speaks to the lack of risk-appetite we continue to see not only within equities but across all asset classes right now.

You can see the first three sectors in the chart below. With Crude Oil futures crashing below zero this week, we think it's prudent to stay away from the Energy sector until the smoke clears.

Click on chart to enlarge view.

From the desk of Steve Strazza @Sstrazza

We don’t need to dig too far into the internals to know breadth has been deteriorating since last week even as the S&P 500 was making new incremental highs. Most large-cap sectors failed to make new highs with the S&P as well as many other major indexes, including small-caps, mid-caps, and Transports.

We’ll talk about this more below. First, here is a new breadth indicator we’re looking at using the Anchored Volume Weighted Average Price (AVWAP).

From the desk of Steve Strazza @Sstrazza

New Mystery Chart!

For those new to the exercise, we take a chart of interest and remove the x/y-axes and any other labels that would help identify it. The chart can be any security in any asset class on any timeframe on an absolute or relative basis. Maybe it’s a custom index or inverted, who knows!

We do all this to put aside the biases we have associated with this specific security/the market and come to a conclusion based solely on price.

You can guess what it is if you must, but the real value comes from sharing what you would do right now. Buy, Sell, or Do Nothing?

From the desk of Steve Strazza @Sstrazza

We turned bearish on equities in February from a structural standpoint and have been tactically positioning ourselves in both directions since. We've taken advantage of the bifurcated market we're in by continuing to find opportunities on both the long and short side. Right now we believe the near-term risk is to the downside in equities.

How defensive should we be and what will it take for us to turn bullish again?

Last week we put together a list of key levels that we want to see certain assets hold before turning bullish on stocks over any longer-term timeframe. We're using this as our risk gauge for now.

As promised, we put that list into a table so that we can easily track and update its progress. Let's dive in and see what the weight of the evidence is telling us right now.

From the desk of Steve Strazza @Sstrazza

Every weekend we publish performance tables for a variety of different asset classes and categories along with commentary on each.

As this is something we do internally on a daily basis, we believe sharing it with clients will add value and help them better understand our top-down approach. We use these tables to provide insight into both relative strength and market internals.

This week we want to highlight our US Equity Index and Industry tables as they illustrate an important resumption in leadership from the market's most resilient areas.

Click on table to enlarge view.

From the desk of Steve Strazza @Sstrazza

Thanks to everyone for participating in this week’s Mystery Chart. The responses were pretty mixed with most wanting to do nothing for now and wait for a retest of the recent highs or lows before taking action.

While it's hard not to like this uptrend over the long-term, doing nothing in the near-term is more or less the camp we're in as well.

With that as our backdrop let's discuss why this chart is important and on our radar right now.

This is a daily line chart of the All Star Charts Custom MAGA Index, which is an equally weighted index of the four largest stocks in the US Equity Market, measured by market capitalization.

From the desk of Steve Strazza @Sstrazza

Today, we put out a post outlining why we are bearish on Small-Cap stocks and want to be shorting the Russell 2000 ETF (IWM). Read it here as it sets the stage for this post.

Small-caps are the weakest area of US Equities. That's why we are expressing our bearish view on stocks via the Russell 2000 as opposed to one of the large-cap indexes, all of which the Russell has severely underperformed for several years now.

In line with our top-down approach, we don't just want to short an index. We are believers that playing the averages results in average returns.

For this reason, we've drilled into the Russell 2000, looked at every single chart and picked out the weakest names we could find with clearly defined risk management levels to limit us to the smallest of losses in the case these names mean-revert higher.

From the desk of Steve Strazza @Sstrazza

In January and February, we cautioned that we wanted to be selling stocks, raising cash and buying bonds due to bearish divergences and deteriorating market internals. At the same time, many major indexes and sectors had achieved our upside objectives and were at logical levels of potential resistance.

The Global Equity Market collapsed and the S&P 500 fell 35% soon after, blowing a hole in the long-term uptrend in most major indexes around the world.

In late March we wrote about bullish breadth divergences and the key levels of interest that made us want to err on the long-side over the near-term.

That ended up being the tradeable low we were looking for as stocks gained 30% and retraced more than half of their recent drawdown in just 15 days.

From the desk of Steve Strazza @Sstrazza

We are always looking at intermarket signals and ratio charts for insight into various asset classes. We've recently written plenty about intermarket relationships that signal risk-appetite, or lack thereof, for stocks as well as others to get a read on yields.

Today's Chart of the Day, High Yield Bonds (HYG) vs Short-Term Treasuries (IEI), is one of our favorite risk-appetite ratios.

Credit Market investors favor High Yield Bonds over Treasury Bonds during the "good times" - periods of strong economic growth, rising rates, etc. On the other hand, we know treasuries are a safe-have asset and outperform in environments where investors are uncertain and want a place to park their capital until the smoke clears.