TOPLEY’S TOP 10 July 30 2024

1. Tom Lee Fundstrat on Small Caps

Fundstrat Head of Research Tom Lee and his team saw an important quantitative signal last week that historically has been followed by strong win ratios for small-caps: The Russell 2000 has been volatile, trading at +/- 1% in 11 out of the last 12 trading sessions. This has happened only 10 times in non-bear markets since 1979 – in 1987, 1998, 2009 (4x), 2011, 2020 (2x). “These were all clear ‘risk-on’ years and more importantly, ‘early cycle’ years,” Lee pointed out. In those historic precedents we found high win ratios for small-caps one-month forward, as well as three, six, and 12 months afterwards. In fact, the historical win ratio was 100% in the three-, six-, and 12-month forward-looking periods. We see this in our Chart of the Week

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2. Over the Last 12 Trading Days…13% Spread Between Small Caps and S&P

@Charlie Bilello
US Small Caps are up 10% over the last 12 trading days while US Large Caps are down 3%. The 13% spread is the largest 12-day Small Cap outperformance ever.

3. What Will It Take for Equal Weight S&P to Outperform Cap Weight?

Barrons Ben Levisohn
Bank of America’s Ohsung Kwon looked at when the equal-weight S&P 500—another proxy for the rotation trade—outperformed the market-cap-weighted version of the index. He found that it did so 90% of the time when the yield on the 10-year Treasury fell a full point from its 12-month high and when the Institute for Supply Management’s manufacturing purchasing managers index rose over four points from its lows. For those two things to happen now, the 10-year yield would have to drop to 3.99% from a recent 4.21%, and the PMI would have to hit 50.5, from June’s 48.5. That seems like a big ask.

https://www.barrons.com/articles/a-stock-market-rotation-has-occurred-what-comes-next-6137aa72?mod=past_editions

4. Corporate Insider Selling

Corporate insiders are dumping stock at the fastest rate in more than a decade
Marketwatch By Mark Hulbert
Corporate insiders have taken a sharply pessimistic turn — selling their companies’ shares at the fastest rate in at least a decade. That’s according to InsiderSentiment.com, a website maintained by Nejat and Jon Seyhun. The former is a finance professor at the University of Michigan and one of academia’s leading experts on interpreting the behavior of insiders. In calculating their insider-sentiment indicators, the Seyhuns focus only on two of the three categories that the law defines as insiders (corporate officers and directors) and ignore the third (a company’s largest shareholders). That’s because Professor Seyhun has found from his research that these large shareholders on balance have no privileged insight into their companies’ prospects. Because their transactions are typically several orders of magnitude larger than those of officers and directors, including them skews the much more valuable signals coming from officers and directors.

The insider indicator that the Seyhuns calculate is the percentage of all companies with any officer or director transactions for which there has been net buying. The past decade’s average is 26%, and up until July this ratio had been slightly to moderately below this average. In the first three weeks of July, however, the insider buy ratio turned “deeply negative” — to 13.6%, its lowest in at least a decade, as you can see from the accompanying chart.