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.
Of the four trade setups we identified--EUR/USD, GBP/USD, AUD/USD, and NZD/USD--the Aussie was the only one that worked.
The fact that many of those trades failed or, more specifically, were never even triggered at all, is information!
Fast forward to today and we're looking at a failed breakout in the US Dollar Index that's been confirmed by strong downside follow-through since last week. Now, it’s time to flip the book long on some of these trades to express our thesis of further USD weakness, at least over the near term.
One trade setup that stands out due to its asymmetric risk-reward profile at current levels is the NZD/USD.
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. 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 their direction and make them a pretty penny.
We've already had some great trades come out of this small-cap-focused column since we launched it late last year and started 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. There are also price and liquidity filters. Then, 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 climbs 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 hottest stocks in the Minor Leagues.
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.
Whipsaws Around The World
One of the most common characteristics of choppy markets are whipsaws. The chart below is a great example of this kind of price action, and we’re seeing it all over the place of late. Many risk assets recently violated key levels of support, but ultimately repaired the damage and reclaimed them. This type of action continues to reiterate that while the market is bending, it’s not breaking. The list of new lows in our internal breadth metrics remains muted, and critical indices and commodities, such as Energy, continue to hold their heads above important levels.
There’s an old adage that “from failed moves come fast moves in the opposite direction." Is this what could spark the next leg higher for the market? Time will certainly tell, but it’s leaning in that direction, at least in the near term.
Check out this week's Momentum Report, our weekly summation of all the action from 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.
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
For the better part of 2021, we've been pounding the table about markets being a chop fest. And we'd seen little evidence suggesting this was likely to change any time soon--until this week, that is.
Trendless… range-bound… call it whatever you want, but the path of least resistance for stocks and many other risk assets has simply been sideways!
Alas, we’re seeing some strong bullish action this week that we simply can’t ignore. Let's talk about it.
Before we get there, though, let’s take a step back and look at small- and micro-caps, as they provide great illustrations of this sloppy stock market story...
SMIDs and micros have not been able to make any real progress for most of the year.
It’s an important question, especially for those of us who maintain exposure to bonds.
And for those of us who don’t, it’s always good to know what’s going on in the fixed income space, as it’s often very valuable information.
Frankly, as investors, it’s irresponsible and negligent to not know what’s going on in this asset class.
It’s the largest market in the world!
And right now we’re seeing evidence of a shift in leadership toward High Yield Bonds $HYG.
We know it’s in our best interest to pay attention to this development so let’s look at a couple charts that suggest bond investors are reaching further out on the risk curve for a higher yield.
From the desk of Steve Strazza @sstrazza and Grant Hawkridge @granthawkridge
Whether more stocks are going up or down these days simply depends on where you look. Some advance-decline lines are moving higher, but others are moving lower.
Weakness and divergences in these indicators are more often than not resolved over time, but the longer they persist the more concerning they become.
This hasn’t been an issue for most of the major averages, as the S&P 500 and other large-cap indexes keep making new highs with confirmation from their A/D lines.
Yet when we look beneath the surface, and particularly down the cap scale, we're seeing a different story. Ultimately, some stocks are going up, but most are not.
You’ve probably heard already, but the current environment is an absolute mess as the weight of the evidence continues to hang in the balance. In today’s post, we’ll discuss some charts that do a great job illustrating all the mixed signals out there right now.
What we do here is take a chart that’s captured our attention, and remove the x and y-axes as well as any other labels that could help identify it.
This chart can be any security, in any asset class, on any timeframe. Sometimes, it’s an absolute price chart. Other times, it’s on a relative basis.
It might be a ratio, a custom index, or maybe the price is inverted. It could be all three!
The point is, when we aren’t able to recognize what’s in front of us, we put aside any biases we may have and scrutinize the price behavior objectively.
While you can try to guess the chart, the point is to make a decision…
So let us know what it is… Buy, Sell, or Do Nothing?
Unless you’ve been stuck under a rock or at the beach all summer, this is old news. And we’ve admittedly been a bit obnoxious when it comes to rehashing this theme. But usually when we find ourselves harping on something, it's because it's a big deal.
Our own behavior can be fantastic information, and it's become a part of our process to pay special attention whenever we begin to repeat ourselves a lot.
This week is no different, as the US Dollar Index $DXY provides another example of the market’s sloppy state of affairs.
Just when we thought we might finally have some decisive price action in the Dollar, Friday’s attempted breakout followed by Monday’s weakness is casting some serious doubts.
Was last week’s breakout above the March pivot highs valid?
Or was it just another failed move to add to the market’s growing list of whipsaws and fake-outs?
