- My charts say it’s a bull market.
- Speculators are underweight stocks.
- This divergence means we have a huge opportunity – right now.
It’s important to take time to stop and look around.
We don’t want to devise a strategy and force it on the market no matter what.
It’s actually the opposite.
The first thing we want to do is identify what type of market environment we’re in.
And then we decide which tools and systems best fit what’s actually happening.
Call Your Offensive Plays
Tony Dwyer, who recently retired after a long and distinguished career, taught me this philosophy.
Tony was the Chief Market Strategist and head of the U.S. Macro Group at Canaccord Genuity for many years.
He was Chief Equity Market Strategist for FTN Financial’s equity arm before that.
Tony is one of my all-time favorite strategists, and I already miss his legendary market takes.
He’s a big sentiment guy, and he definitely influenced my work in this field.
The way Tony described healthy bull market environments went something like this: “When the offense is on the field, call your offensive plays.”
That’s stuck with me.
It’s exactly how we’ve been conducting ourselves, in fact.
We’re buying stocks and other risk assets (calling our offensive plays) while breadth is expanding and indexes are hitting new highs (the offense is on the field).
Here’s Technology vs Consumer Staples:
When this ratio is going up, money is flowing into offense and out of defense, simple as that.
In this case it’s even more telling because Tech is taking out its dot-com bubble high from March 2000 to go on and make new all-time highs.
Not only is the offense on the field.
You have your best lineup out there – with your entire team healthy.
Now is the time to score.
Where’s the Defense?
Well, if the offense is on the field, and we should be calling our offensive plays, what’s the defense doing?
Here are the Consumer Staples vs the S&P 500:
As it turns out, defense is hitting its lowest levels in history compared to its peers.
We’re seeing new all-time lows for the ratio of defensive stocks and the rest of the market.
This is a classic characteristic of healthy market environments.
When Consumer Staples outperform, stocks generally are probably under more bearish pressure than usual.
We’re seeing the exact opposite.
And speculators – including hedge funds and other asset managers – are underweight stocks.
Everybody’s wrong.
They should be overweight in this environment.
And that’s the opportunity.
Meanwhile, consumers have historically low expectations right now, another sign of big impending returns.
The time is now.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs