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Breadth Thrusts & Bread Crusts: Staying on the Right Track

October 21, 2021 by Peter

From the desk of Willie Delwiche.

“If you board the wrong train, it is no use running along the corridor in the other direction.”

German pastor and Nazi resistor Dietrich Bonhoeffer

If the train you are on isn’t going where you want to go, changing locations on the train is of little use. You are still going to wind up in the wrong place.

Sometimes, we believe a train is heading to one place, when it’s actually going somewhere else. Or, after boarding, our view of where we would like to go changes entirely. In either case, we are on the wrong train and need to think about how to get off.

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October Conference Call: 5 Key Takeaways

October 20, 2021 by Steve Strazza

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

On Tuesday night we held our October Monthly Conference Call, which Premium Members can access and re-watch here.

In this post, we’ll do our best to summarize it by highlighting five of the most important charts and/or themes we covered, along with commentary on each.

Let’s get right into it!

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Finding Alpha in the Bond Market

October 20, 2021 by Ian Culley

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

It’s no secret.

As investors, we’ve been rewarded for buying stocks and commodities over bonds for more than a year now. And this will most likely remain the case, as more evidence suggests we’re in an environment that favors risk assets.

The copper/gold ratio hitting new seven-year highs, AUD/JPY testing its year-to-date highs, and cyclical stocks assuming leadership all point to an increasingly risk-on tone.

But for some of us, it’s not as simple as selling bonds and walking away. In some scenarios, we must have exposure to the bond market.

If that’s the case, we want to focus on the riskier areas of the market, just like we’re doing with other asset classes.

Let’s look at a few charts that direct our attention to the strongest areas of the bond market. [Read more…]

[PLUS] Weekly Sentiment Report

October 20, 2021 by Peter

From the desk of Willie Delwiche.

Key Takeaway: Sentiment remains neutral as bulls are on the rebound. Both II and AAII bulls ticked higher last week, and the 5-day put/call ratio dropped to levels indicating complacency. We may have seen the reset in optimism that was needed despite a lack of pessimism suggesting a complete unwind. With neither widespread fear nor clear evidence of sustained breadth improvement, the US is in limbo, challenging previous highs yet not confirming a breaking higher. Our suspicion is that a bout of disappointing news or earnings reports could quickly see nervousness and fear return. That could lead investors to search for better opportunities where sentiment has shifted from optimism to pessimism and breadth is clearly improving (EM, anyone?).

Sentiment Report Chart of the Week: Throwing In the Towel On EM

The latest BofA Fund Manager Survey shows that the widespread optimism on Emerging Markets that was present at the start of the year has turned to pessimism. Investors are currently underweight EM and looking to get increasingly so. While China dominates the EM indexes and headlines, breadth there is improving and price has started to stabilize. What the crowd is throwing out, we might want to think about picking up.

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The Risk Revival

October 20, 2021 by Steve Strazza

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

Most risk assets peaked during Q1 or May of this year and have consolidated in sideways ranges ever since.

But the bulls have started to take control of many of these trends. We’re seeing more and more upside resolutions — and this phenomenon isn’t limited to Crude Oil, Rates, AUD/JPY, and cyclical stocks. Similar patterns are also playing out when we look at intermarket ratios, particularly those we use to measure risk appetite.

In today’s post, we’ll dive into one of our favorite risk-appetite relationships and check for price confirmation in a variety of ratios.

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Buy In October and Get Yourself Sober

October 20, 2021 by JC

They love writing about ‘Selling in May and going away’.

Every year, they just can’t get enough of it.

But what about, “Remember to buy in November”?

Historically the best 3 month period of the year for stocks is from November through January.

As my pal Jeff Hirsch likes to say, “Buy in October and Get Yourself Sober”.

Here are all the seasonal cycles for the S&P500. The Green line includes every year since 1950 (1-year Cycle), the Blue line includes every year ending in 1 since 1951 (Decennial Cycle), and in Gray every post-election year since 1953 (Presidential Cycle): [Read more…]

[Options] My Favorite Strategies: Bullish Risk Reversals

October 20, 2021 by Sean McLaughlin

(While on vacation until Oct 26th, I’m going to be sharing some anecdotes on my favorite trading strategies: why I use them, when, and how I manage them once they are on.)

Ok, so perhaps there’s some recency bias here as the most recent bullish Risk Reversals I’ve put on have worked. Really though, all that has done is remind me that I should probably do more of these trades.

In a nutshell, a bullish Risk Reversal is a trade where we short naked puts and use those proceeds to pay for long calls. That’s right, the market pays me to get long!

The trade is put on for a small net credit (ideally), and the short term goal is to ride an increase in the value of the calls which will allow us to sell a portion of them and use those proceeds to buy-to-close all the naked short puts. This then leaves us long the remaining portion of our calls for free! The calls could eventually reverse on us and go to zero, but we’ll still keep the credit we received when we originally put the trade on (plus whatever credit we may have gained when we sold some calls to close all the puts). This is a great situation to be in! [Read more…]