Small-Cap Buy Signals Abound…

“Most of the time when markets move, no one has any idea why. A man who can tell a good story can make a good living as a broker. It was the job of people like me to make up reasons, to spin a plausible yarn. And it’s amazing what people will believe.” ~ Liar’s Poker

Good morning! 

In this week’s Dirty Dozen [CHART PACK] we discuss the short-term buy signals we’re seeing for small-caps, go over the widening cracks in credit, the double-top in bonds, and the relative attractiveness in materials, plus more… 

Let’s dive in. 

***click charts to enlarge*** 

  1. July marked the 6th consecutive monthly bull bar for the SPX. It’s now at the apex of its 16-month rising wedge in the 3rd up-leg of a Buy Climax. Our current base case is we see a pitch over bull trap followed by a 1-3 month reversal/consolidation


  1. Six consecutive monthly bull bars is a rare thing and a sign of strong structural demand pressure. So, while we should see a multi-month pullback soon. That dip (10-20%) will get bought as the bulls still clearly control this market and it doesn’t pay to try and fade this type of momentum. 

Our backtester (this feature is being added this week to our internal dashboard for Collective members) shows there have been 10 similar past occurrences and the average returns are strongly positive on a go forward basis


  1. I shared this chart a few weeks ago and credit spreads have widened further since. Credit sits above equities in the hierarchy of markets which is why it often leads and why this chart is important. 

This is common in the final stages of a buy climax. 


  1. In a similar vein, IG spreads are widening from their tightest levels in history. Remember Minsky’s Law “stability is destabilising” and in markets things can get too good… 


  1. US 10-year bonds have put in a Matryoshka double-top (monthly, weekly, daily).


  1. Maybe we see yields rise and small-caps outperform until the buy climax in equities sputters? 


  1. The McClellan Summation Index is turning up and should give a buy signal for small-caps this week…


  1. And our Nervous & Numb indicator which looks at the technical relationship between the SPX and the VIX put in a 2 sigma bullish signal on Friday, which means we could see the market go on a quick run here…


  1. The materials sector continues to show building internal technical strength and fundamentals. The sector is seeing new 52-week highs climb following a technical correction.


  1. MACD Buy Signals in the sector recently climbed to their highest levels since the COVID bear market low.


  1. And materials have the strongest relative forward EPS trends out of all the sectors. 


  1. We pitched CTVA in these pages a few weeks ago but another play in the Ag arena I’m looking at is Intrepid Potash (IPI). IPI is a small-cap potash maker with a nice technical setup on the weekly and dailies. It has a strong balance sheet, is trading at 7.5x FCF, and has a tiny float.


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Thanks for reading.

Stay safe out there and keep your head on a swivel.

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