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

Back in August, we presented two opposing views of the relationship between stocks and bonds.

The question was, after running into resistance at a key extension level, in which direction would the $SPY/$TLT ratio resolve?

Would stocks break higher relative to bonds, in the direction of the underlying trend?

Or would the ratio roll over in favor of bonds? It would certainly be a logical level for a trend reversal...

Fast forward two months, and we finally have our answer.

Turns out it was the former -- stocks are breaking higher relative to bonds. Here's a look:

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

Using the S&P 500 as your investment proxy, you’re probably happy with your returns so far this year.

That's even with the 5% pullback we finally saw last week -- the first 5% pullback for the S&P 500 in 2021, and it took 229 trading days.

But the averages aren’t telling the whole story. Some stocks are going up, but most are not. We've been pounding the table about this for months already, and it's been the main theme during the first three quarters of the year.

Unless you’ve been living under a rock, you already know the current environment is an absolute mess, as the weight of the evidence continues to hang in the balance.

In this post, we’ll show you why the S&P 500 is not the stock market and the stock market is not the S&P 500. 

When we analyze equities as a “market of stocks” rather than “a stock market,” it becomes clear that we're in the thick of a correction that started as early as Q1.  

Here at All Star Charts, we like to call this a stealth correction!

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

We held our October Monthly Strategy Session last night. Premium Members can access and rewatch it here.

Non-members can get a quick recap of the call simply by reading this post each month. 

By focusing on long-term, monthly charts, the idea is to take a step back and put things into the context of their structural trends. This is easily one of our most valuable exercises as it forces us to put aside the day-to-day noise and simply examine markets from a “big-picture” point of view.

With that as our backdrop, let’s dive right in and discuss three of the most important charts and/or themes from this month’s call.

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

The US dollar marches to the beat of its own drum.

Interest rates are rising across the curve, sparking strength out of economically sensitive areas within stocks and commodities.

Crude oil and the energy-heavy CRB Index are breaking to new six-year highs and the energy sector SPDR is testing a crucial area of former support turned resistance -- all while the US Dollar Index is catching a bid. 

It’s not every day we see the dollar and commodities rally in tandem.

This environment suggests the dollar should be rolling over or chopping sideways at best. Yet it continues to show strength!

When markets don’t do "what they should,” that’s valuable information. And in this case, it raises some important questions.

How often does the historically inverse correlation between the dollar and commodities decouple? 

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 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.

From the desk of Steve Strazza @Sstrazza

Our Top 10 Charts 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.

From the desk of Steve Strazza @sstrazza

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.

From the desk of Steve Strazza @Sstrazza.

Welcome back to our latest "Under The Hood" column, where we'll cover all the action for the week ended October 1, 2021. This report is published bi-weekly and rotated with our "Minor Leaguers" column.

What we do here is analyze the most popular stocks during the week and find opportunities to either join in and ride these momentum names higher or fade the crowd and bet against them.

We use a variety of sources to generate the list of most popular names. There are so many new data sources available that all we need to do is organize and curate them in a way that shows us exactly what we want: a list of stocks that are seeing an unusual increase in investor interest.

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

Energy is the clear leader in the commodity markets right now. Our equally-weighted energy index is up 13.76% over the trailing month and 6.58% in the last five days.

The emerging strength from this group is supported by a rising rate environment that could be just getting started.

So, crude oil to 100 dollars and natural gas to 9?

Maybe! But before we get ahead of ourselves, there are still plenty of mixed signals and divergences that need to be resolved.

One that stands out is the lack of confirming price action between economically sensitive commodities. Let’s take a look!

Here’s a chart of Crude Oil futures, Copper futures, and Copper Miners $COPX:

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

Bond yields are breaking higher across the board. So, it’s essential to understand that some stocks do better amid rising rates, while others prosper in markets with low growth and low yields. 

For instance, cyclical and value stocks should outperform in a rising rate environment.

Meanwhile, growth, tech stocks, and any long-duration assets (bonds) typically lag. They become less attractive during periods where more economically sensitive areas offer more appealing opportunities.

And we’re already seeing this rotation into the rising rate beneficiaries, while growth stocks have come under pressure in recent weeks.

In today’s post, we’ll look at market internals of these groups to see what they suggest about recent price action.

We can compare growth to cyclicals by analyzing the ratio of Large-Cap Tech $XLK to Energy $XLE.

And we can further illustrate this growth-versus-value relationship through a variety of derivatives. They all tell similar stories.

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

We’re finally starting to see resolutions in the bond market.

The 30-year yield is back above 2.00%, the 10-year has reclaimed 1.40%, and the 5-year yield has cleared 1.00% for the first time since February 2020.

Now that it appears rates have picked a direction, what are the implications for the other two major asset classes, stocks and commodities?

As we highlighted last week, we want to look at cyclical and value stocks along with economically sensitive commodities, specifically energy and base metals.

And, in case you haven’t heard, higher yields should also put a bid in financials.

Earlier in the month, we pointed out the relationship between the 10yr-3mo spread and Regional Banks $KRE relative to the S&P 500 $SPY.

Today, we want to follow the same train of thought but apply the analysis to Broker-Dealers $IAI.

Here’s the chart of the 10-year 3-month treasury spread overlaid with the IAI/SPY ratio:

From the desk of Steve Strazza @Sstrazza

Welcome to the 2 to 100 Club.

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.