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.

Another week, another IT trade setup that we're looking at. While there is a pickup in the market sentiment, the ideas with most conviction are coming through from IT.

Let's take a look at what we have today!

It's a new year!

Are you ready to crush it?

I am.

But it seems investors are coming in skeptical of what 2022 might bring.

As we've already mentioned, the data points to investors being much much more bearish coming into 2022 than they were going into 2021 or 2020, where they were incredibly bullish and optimistic going into those years.

But as we know all too well, stocks peaked in February of both those years, on an absolute basis in 2020 before the COVID crash, and internally in 2021 when many stocks started their declines.

The data is in.

2021 is in the books.

And it was a good one for most risk assets. Although the majority of stocks had their struggles at some point throughout the year, sector rotation continued to drive index prices higher. And it wasn't just stocks, risk assets in general had one for the record books.

The Average stock in the S&P500 was up 27.6% in 2021.

The Median S&P500 stock returned 25.2% for the year.

The market had been a mess for most of 2021. But even as the weakness persisted at the end of the year, we repeatedly highlighted the strength coming through in the IT space.

Well, this post is no different. We have breakouts, people! Let's take a look!

Below is the IT index with the important levels that we'd like to track.

Nifty IT has been sticking its head out every time we've looked for bullish momentum and strength in the market. And that strength is evident from the chart below when you look at the bottom pane of the chart. The relative strength pops right off the page. We can also see that the average drawdown has been a low 15% while most sectors have it way worse with no show of strength whatsoever.

What's our pick from the sectors even now?

IT.

Click on the chart to zoom in.

From the desk of Steve Strazza @Sstrazza

Yesterday, we wrote a post about scanning for new lows, putting our own spin on a strategy called "Wall Street's only free lunch."

I was joking with JC that it felt a bit uncomfortable to search through such a weak list of stocks. After all, we’re used to scanning for strength.

But the scan was a fun exercise, and we found some weakness we want to be buying in secular leaders. 

The universe wasn’t exactly full of strong stocks, as we were scanning for new 52-week lows. But that’s OK; we have plenty others for that.

In this post, we’re going to walk through another scan we did internally this week. Unlike the "free lunch," this one is more in line with our top-down approach of finding the strongest stocks in the strongest groups.

While we're still scanning for new lows, we’re doing so on a much shorter time frame, and we're adding additional filters to ensure all the stocks on our list are leaders.

The bond market continues to price in higher inflation and higher interest rates.

The types of stocks that tend to do well in that environment are Energy and Financials. So that's where we're looking.

An area that continues to see relative strength is in Semiconductors. One name in particular stands out from Amsterdam is ASML.

We talk about all of this and more in this short New Year's Eve Clip:

From the desk of Steve Strazza @Sstrazza

Our Hall of Famers list is composed of the 100 largest US-based stocks.

These stocks range from the mega-cap growth behemoths like Apple and Microsoft – with market caps in excess of $2T – to some of the new-age large-cap disruptors such as Moderna, Square, and Snap.

It has all the big names and more.

It doesn’t include ADRs or any stock not domiciled in the US. But don’t worry; we developed a separate universe for that which you can check out here.

The Hall of Famers is simple.

We take our list of 100 names and then apply our technical filters so the strongest stocks with the most momentum rise to the top.

Let’s dive right in and check out what these big boys are up to.

Here’s this week’s list:

And here’s how we arrived at it:

Our friends over at Stockcharts.com asked me to put together a short video on the most important theme of 2021.

For me, it's hard to ignore how breadth deterioration throughout the most the year impacted sentiment. This summer, the extreme levels of bullishness among individual investors and financial advisors became a headwind for stocks.

After the prices of those stocks deteriorated further into the Fall, that sentiment flipped to the opposite extreme. We came into December 2021 with the most bears in over a year and fewest bulls since April 2020.

As we enter 2022, sentiment is very different than how things looked entering 2020 and 2021.

By my work, this time is different. Very different.

We debuted a new scan recently- The Outperformers.

The Outperformers is our newest scan that pinpoints the very best stocks in the market. It’s the fastest, easiest way to find quality names that are primed for major moves.

The goal is that as the market rally progresses, the sector rotation within the market will reflect in this scan. So while our Top/Down Analysis helps us with the broader view of the market, this Bottom/Up scan makes sure that we catch the slightest change in sentiment.

From the desk of Steve Strazza @Sstrazza

"There's no such thing as a free lunch."

Many of you are already familiar with this popular market adage as it is a commonly used quip in our industry.

All it really means is that you can't get something for nothing from the market.

Have you ever bought a high-yielding stock for the dividend and rode it into a big drawdown just for them to announce they're cutting the payout?

Did you listen to a friend about a biotech stock that was supposed to rip higher on positive FDA results... but it actually gapped lower?

How about following the analyst community into a stock that was a consensus buy... until it turned out not to be?

In all of these scenarios, the investor is simply looking for a free lunch. And 9 times out of 10, these situations don't work out. There are no easy investments or get-rich-quick tricks on wall street. At least not sustainable ones. You have to put in the work.

One rule that I live by for my own investing is this: "If it seems too good to be true, it probably is."

From the desk of Steve Strazza @Sstrazza

When investing in the stock market, we always want to approach it as a market of stocks.

Regardless of the environment, there are always stocks showing leadership and trending higher.

We may have to look harder to identify them depending on current market conditions… but there are always stocks that are going up.

The same can be said for weak stocks. Regardless of the environment, there are always stocks that are going down, too. 

We already have multiple scans focusing on stocks making all-time highs, such as Hall of Famers, Minor Leaguers, and the 2 to 100 Club. We filter these universes for stocks that are exhibiting the best momentum and relative strength characteristics. 

The point is that we spend a lot of time identifying and writing about leading stocks every week, via multiple reports. Now, we’re also highlighting lagging stocks on a recurring basis.

Welcome to the Short Report.