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Market review 22.11.06
alphacharts.substack.com

Market review 22.11.06

Follow price and the smart money

Brian G
Nov 6, 2022
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Share this post
Market review 22.11.06
alphacharts.substack.com

Hello everyone,

The message in these blog posts has been to:

  1. Follow breakouts in leaders

  2. Avoid laggards / refrain from trying to “buy the dip” in downtrends

We’ll look more at the sectors leading and lagging, but first I want to show why it’s so dangerous to follow mean-reversion indicators (eg. Sentiment, RSI) to “buy the dip” in downtrends.

Bear markets tend to have chronic oversold and low sentiment readings. Yes, when these readings hit extremes, they can result in short countertrend rallies. That’s what’s been happening all year when we look at AAII sentiment data:

But bear market rallies are difficult to profit from since they are short-lived and have limited upside. Stick to bull markets where it's much easier to win. This leads us nicely into energy & materials.

Materials

Chinese ETFs posted the biggest gains this week on hopes that China will be coming out of Covid lockdown.

The next strongest segment were materials. SLX, REMX, and COPX were up 8-10%. In fact, on Friday, COPX had its largest daily % gain since Mar ’20.

These materials ETFs are rallying off major multi-decade support, as we looked at 2 weeks ago. Within this space, stocks showing recent breakouts include: RS, CMC, STLD, TRQ, and ALB.

Energy

Crude oil had a strong day on Friday. Like materials, WTI and Brent crude oil are rallying off multi-decade support:

We’ve already seen major breakouts for energy equities on the yearly charts. Below are monthly charts for the Canadian Energy ETF (XEG) and its 2nd biggest holding (SU). Keep an eye on how they close the month, as both are in the process of coming out of multi-decade bases.

Something that didn’t hit me until just this week: energy has been the strongest part of the market for the past 4 years in a row!

Twitter avatar for @alphacharts
Brian G @alphacharts
The top performing non-leveraged ETF by year: 2019: $TAN +59% (solar) 2020: $TAN +224% (solar) 2021: $XOP +67% (oil) 2022: $PXE +75% YTD (oil) You notice a theme here? #energy
4:35 PM ∙ Oct 31, 2022
39Likes2Retweets

Relative strength tells us where demand is most outstripping supply. And what’s consistently had the most imbalance for the past several years is not shiny rocks, blocks, monkey JPEGs, cloud, chips, cannabis, or I.O.U's. It’s energy.

Not only does the oil sector have the highest momentum, but smart money continues to be very long.

Tech

This has been the weakest part of the equity market all year, so it should be no surprise that it took another hit this week. There’s now a long list of tech/growth ETFs back within 2% of their 52-week lows, including BUG, BLOK, CLOU, SOCL, ARKK, VUG, QQQ, and XLC.

BUG (Cybersecurity) was one area of tech that was holding up relatively well last year. This week, it broke down hard relative to the broader market:

Back in Oct, I wrote a post on trading strategy titled “What works and what doesn’t.”

The trading activity of institutions & insiders leaves footprints behind in price. Trend following works in part because it is riding the coattails of the smart money. We can also directly see what the smart money is doing through various filings:

  • CFTC’s weekly Commitment of Traders report

  • SEC Form 13F – quarterly activity of investment managers with $100M+ AUM

  • SEC Form 4 – daily insider transactions

For the last one, there’s a caveat saying that goes:

“Insiders sell for various reasons, but they only buy for one reason.”

However, when insiders from multiple companies within a sector all sell at the same time and in abnormal amounts, we want to pay attention.

Late last year, around when tech stocks (and broader market) peaked, there was a cluster of heavy selling activity by all CEOs of the largest tech firms:

Interesting observations:

  • Jeff Bezos sold $6B (his highest sale ever) 2 months before stepping down as CEO of Amazon. That’s when AMZN peaked.

  • Satya Nadella sold half his Microsoft shares the same month MSFT peaked.

  • Elon Musk made his largest sales the month TSLA peaked

  • Tim Cook only sold once since 2020, and it was just 5 months before AAPL peaked

  • Mark Zuckerberg unloaded a total of $5B gradually over a year, but his selling climaxed the month META peaked. Similarly, Sergei Brin & Larry Page sold more than $5B gradually over a year, and GOOG peaked near the end of their selling window.

While FANGMAT insiders unloaded record amounts in a very timely fashion, retail traders have been banging on the old “buy the dip” mantra in tech all year with disastrous results. ARKK took in $580M of net inflows in the past 12 months while its price fell a whopping 72%.

I’ll also note that ARKK had its largest monthly inflow ever in Feb ’21 (the month that it peaked). Similarly, the behemoth QQQ ETF saw its largest ever monthly net inflow in Dec ’21 – just a month after it peaked. Not surprising.

Closing Notes

We looked at the strength in energy/value and weakness in tech/growth areas. I tweeted 4 ratio charts that bring it all together:

Twitter avatar for @alphacharts
Brian G @alphacharts
"You are here" • $SPX vs. $XLE • $SPX vs. $TSX • $SPX vs. $SPXEW • $VUG vs. $VTV
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12:47 AM ∙ Nov 3, 2022

I’ll leave you these tweets to reflect on:

Twitter avatar for @alphacharts
Brian G @alphacharts
How do you ensure you miss out on the big trends? • Being overly smart (fading everything & everyone) • Being overly fearful Do this instead: • Follow leadership • Focus on bigger timeframes • "Above line good, below line bad" It doesn’t have to be complicated.
12:53 AM ∙ Nov 4, 2022
29Likes3Retweets
Twitter avatar for @alphacharts
Brian G @alphacharts
Maybe it's not the Fed that needs to pivot, but your strategy?
6:13 PM ∙ Nov 2, 2022
24Likes2Retweets
Twitter avatar for @alphacharts
Brian G @alphacharts
Twitter spaces discussing Fed, forecasts: XXXX Twitter spaces discussing trading rules, lessons: X
6:51 PM ∙ Nov 2, 2022

That’s all for this week! If you found this post useful, please give it a like and share. Thanks for reading.

Twitter: @alphacharts.


Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.

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