From the desk of Steve Strazza @sstrazza

This is one of our favorite bottoms-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. What remains is a list of stocks that large financial institutions are putting big money behind... and they're doing so for one reason only: Because they think the stock is about to move in...

From the desk of Steve Strazza @Sstrazza

Welcome to our latest Minor Leaguers report.

We've already had some great trades come out of this Smallcap-focused column since we launched it late last year and began rotating it with our flagship bottoms-up scan, "Under The Hood."

To make the cut for our Minor Leagues list, a company must have a market cap between $1 and $2B. After applying price and liquidity filters, we simply sort by proximity to new highs in order to focus on the best players.

The goal is to catch the strongest names while they're small and still have serious upside potential. If any of these stocks ever climb the ranks to the big leagues, the returns could be huge. We're looking at 5-10x moves just to break into large-cap land!

Let's dive into this week's report and see what's happening in some of the...

From the desk of Willie Delwiche.

Key Takeaway: Fed-fueled volatility exposes weakness beneath the surface. Breadth trends at odds with index-level resiliency. Drop-in yields and defensive sector leadership consistent with elevated risk environments.

• Last week’s volatility produced a shake-up in our relative strength rankings. Materials and Financials both saw big drops, while Technology and Communication Services surged into the lead.
• Looking beyond the cap-weighted S&P 500 sectors shows a less decisive shift in leadership - Energy & Real Estate remain strong, both at the sector level and in terms of the industry group heat map.

The process of analysis is such that there are times when trends emerge and times when things are simply messy. Over the past week, with the halt in the trend of the major indices, something emerged on the charts. This something demanded attention.

Negative divergences appear when momentum does not follow the price movement. When there is a disparity between the price move and the indicator, it is a sign of caution. Not to say that a contrary position can be assumed immediately, but the sentiment certainly turns cautious!

So what is it that's hinting at being cautious in this market?

Let's take a look!

The market indices together are saying that the current trend isn't as strong as it seems. Why do we say so?

Here we have our stock universe Nifty 500. This past week's close brought along with it a negative divergence on the chart. As can be seen below, despite the price making a higher high, the indicator went on to mark a lower high. When this happens, we get an insight into the inherent strength of the market. Or in this case, weakness.

Does this mean we can go ahead and start building short positions...

It turns out that "Diamond Hands" and "HODL" are not real strategies.

How about that?

This weekend's action only just reinforces the hot mess this asset class finds itself in.

And it's not just Bitcoin and Ethereum.

Downside participation is really beginning to ramp up under the surface.

Many of these tight ranges we've been discussing these last few weeks seriously broke down this weekend.

Behind the scenes, the weight of the evidence is shifting more and more to the bear camp.

From the desk of Steve Strazza @Sstrazza

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 context of the big picture 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.

• Macro Universe:
  • There was pervasive weakness in our macro universe this week as 85% of our list closed lower with a median return of -2.17%.
  • The VIX index was the big winner, closing out the week with more than a 30% gain and registering fresh 4-week highs in the process.
  • The biggest loser again this week was Lumber, with another massive weekly loss of -15%
  • Despite the weakness (and something we haven’t said since April), the...

From the desk of Steve Strazza @Sstrazza

Our Top 10 report was just published. In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.

Using Caterpillar And Copper As A Risk Barometer

On the topic of high-beta names, here’s a behemoth from the Industrial sector. We think of Caterpillar as an index in and of itself - a barometer for global economic growth, reflation, cyclicality, etc. It’s all reflected in CATs stock price, as it is highly correlated with risk assets such as Copper and Emerging Markets. The stock recently made its first lower low in over a year, suggesting we continue to approach these offensive areas with caution. We’ll be watching to see if Copper, and others... even risk-on forex pairs like the Aussie/Yen, will continue to follow Caterpillar’s path. How much structural damage is endured before we get a tradeable bottom in these assets will provide us valuable insight regarding the future market environment for risk-taking.

...

This week we're looking for a long setup in the Consumer goods sector. With the market finding its way around, defensives like Consumer goods are picking up pace.

Today we will share one such idea that stands out from a risk-reward perspective.

It's Saturday Morning Chartoons time. You can read more about the reasoning behind this post here. 

We're just interested in aggregating all of the charts we put together throughout the week and organizing them all into one, easy to flip through deck.

One thing that stood out to me this week was this table of new highs and new lows. It's a great way to visualize what's going on underneath the surface:

I also see here how investors have way too much exposure to stocks, compared to historical measures. We're seeing this in other sentiment data too.

But here's the Household Asset Allocation Stocks vs Bonds ratio:

And finally, I came across this old gem to remind us how important relative strength is for stocks and sectors in the market. Or in this case, a lack of relative strength.

There were plenty of warning signs in financials, particularly Lehman and Bear...

We retired our "Five Bull Market Barometers" in mid-July to make room for a new weekly post that's focused on the three most important charts for the week ahead.

This is that post, so let's jump into this week's edition.

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

Whether you trade commodities or not, it’s been impossible to ignore the recent sell-off in Lumber, as prices have collapsed almost 30% in just the last month.

We pointed out in May that Lumber was due for a digestion of its recent gains.

Well, let’s just say we got a lot more than that! Sometimes markets correct or consolidate through time, and sometimes they correct through price.

And Lumber is most definitely correcting through price!

But Lumber is not the only procyclical commodity to enter a corrective phase. More recently, DR. Copper has begun to digest its recent gains through price as well.

These corrections have already done some damage to the primary uptrends at play as both of these economically sensitive commodities have recently violated critical support levels.

Another point we raised last month was that many...

From the desk of Willie Delwiche.

As the weight of the evidence has shifted from bullish to neutral in the first half of 2021, active investors can find more solace in moving to the sidelines and holding on to a little more cash. This week may have intensified that feeling. Commodities suddenly seem bidless, the S&P 500 has moved from an all-time high to testing its 50-day average over the course of a week, and bonds sold off then reversed course, sending the yield on the 10-year T-Note to its lowest level since early March. Dramatic moves across stocks, bonds and commodities this week can obscure the trends that have emerged over the past six months. Commodities & stocks have been strong and bonds have been weak. That may very well change as we move into the second half, but let’s not overlook the path that has gotten us to where we are this year. So with just a handful of trading sessions to go in the first half, we still have the broad commodity ETF up 27% YTD, with SPY still carrying a double-digit gain and AGG still in negative territory....

This is the video recording of our June 18, 2021 All Star Charts Crypto Weekly Strategy Session.

One of the most telling and obvious risk-on indicators would be the Nifty Small Cap 100 index. Why is that so?

Because when you look at a market rally, the longevity of that particular rally can be gauged by market participation. This is something that should be viewed closely. If a particular index is making new highs, how many stocks are contributing to that move?

Is it a handful? Is it a majority of the stocks? These are data points that will hint at the inherent sentiment of the move.

So let's take a look at what the Small Cap-100 new highs are telling us.

Breadth indicators are important to see the internal structure of a market move. We get valuable insights from what we see that can help us determine the strength of the trend.

First up let's take a look at the most immediate tactical view. Let's take a look at the % of stocks making new highs//lows over a 10-day period. What we find is that as the Small cap 100 index clocked new highs, the % of stocks making 10-day highs contracted. On the other hand, we got a minor expansion in the % of stocks making 10-day lows.

That is certainly not the trend you'd like to see. You'd want...

From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge

We’ve pounded the table about historic breadth thrusts since we first saw these readings start to pop up in early June of last year.

It's now a year later, and we're still seeing them... In fact, the S&P 500 recently registered its highest percentage of new 52-week highs in history - absolutely crushing the historic reading we saw in Q4 of last year.

So, why is this important?

These extreme readings are as bullish as it gets and are a very common characteristic of the early innings of a fresh bull market. It's as simple as that, right?

Well, yes... But, not exactly...

While these extreme readings in our breadth indicators are undeniably bullish looking out over any period of more than a few weeks/months, over the very near-term these same bullish developments are actually cautionary signals and are often evidence of exhaustion and tend to be followed with some...

From the desk of Steve Strazza @Sstrazza and Grant Hawkridge @granthawkridge

Thanks to everyone who participated in last week's mystery chart.

We asked whether this chart had the momentum to finally reverse course and break loose from the grips of its primary downtrend.

The responses were mixed, with many wanting to wait for more information... In many cases, looking for confirmation of the impending breakout.

Well, not much has changed as the chart has yet to make a decisive move from this key level.

The chart was a weekly candlestick view of the MSCI Frontier Markets ETF $FM.

Let's dive in and see how we want to play this index comprised of stocks from some of the least developed countries around the world.

This is the video recording of the June 17th Town Hall Meeting w/ Willie Delwiche

06/17/21 2PM ET

From the desk of Willie Delwiche.

I planned on writing about how fishing is a great metaphor for investing. 

But I’ll have to tackle that idea another day. 

Today, I’m thinking about fishing not as a metaphor for investing, but as a metaphor for not investing -- actively stepping away to preserve financial capital. Perhaps even more importantly, stepping away to rebuild mental capital. 

Whether it's casting for trout in Oregon or trolling for salmon in Lake Michigan, getting away from our screens and electronic gadgets and connecting with the water is clarifying and restorative. It’s not just about the catch… 

Beyond fishing, it's important to cultivate places where we can get away from it all, even if for just a few moments. We need to find places where we can set aside the active wrestling with trends and troubles. Places where we can catch our breath, clarify our thoughts, and reinvigorate our souls.