• Markets have bounced strongly off last week’s lows, with many markets reversing breakouts below major support levels that occurred over the last 2 weeks
  • SPY, QQQ, IWM, XLI, XLP, XLY and EZU have all rallied strongly
  • Continue to pay attention to EEM. If it breaks decisively below its recent range, it could signal further weakness in risk assets
    • Remember that changes occur at the margins first, then spread to the core

• Energy stocks (XLE) are an exception to the current selloff in stocks, and while they have come down a little, could still be headed for a test of its current cycle highs. Oil prices are back in the high $80s, but this is still too high with macro conditions deteriorating all over the world

• Fixed Income ETFs are in a precarious position
  • TLT has broken below its range, and is close to testing its June lows. But if it rallies again, and manages to break out to the upside decisively, be prepared for more turbulence in markets
  • EMB’s (Emerging Market USD denominated debt) rally has started to reverse, falling sharply to indicate that the global USD shortage is getting worse, and pointing towards a further sell off
  • LQD, HYG, and EMB are not mechanically tied to UST prices. Should a financial or economic crisis arise, UST prices can rise even as other fixed income assets sell off

Trading Ideas – Performance

Trading Ideas – Commentary

• Exited straddle on XLU (strike 72, expiry Sep ‘22) for a net profit of 4.38%
  • XLU had quite a journey over the 5 months that we held a straddle on it. It collapsed from its then all time high ~77 in April, to testing its Russian war lows ~64 in June; a period of time which coincided with the height of the selloff in equity markets. Since then, it has rallied back to make new all time highs ~78

• Re-entered short in IWM at 186.95 after it gapped lower on the open
  • High beta small cap stocks are primed to suffer heavy losses given equities’ bearish trend, and deteriorating macro conditions 

• Re-entered short position in EMB after it broke below major support ~88
  • Trade aims to capitalize on EMB’s bearish trend, as well as deteriorating global macro conditions
  • EMB can still fall even if prices of USTs keep rising (yields fall), if macro conditions get bad enough
    • It has already broken below its 2020 COVID low, signaling increasing stress in the global USD funding market

Trading Ideas – Long

• TLT
  • This trade is covered in our Macro Edge reports

Trading Ideas – Short

• IWM remains vulnerable to deteriorating macro conditions, especially with how bearish 2022 has been for small cap equities
  • The trade can also be expressed via other high beta ETFs, like QQQ and XLY

• LQD, HYG, EMB
  • LQD, HYG can still make a large move lower, with a test of COVID 2020’s lows a real possibility, especially with EMB having already done so

• XLE looks like an increasingly attractive short
  • Global economic conditions are rapidly deteriorating
  • Oil prices are off their peak even with global supplies tight, and Russia’s war dragging on
  • Patience is needed here for XLE to make a decisive break lower, as it has managed to rally strongly in recent weeks

• EEM and FXI are good short candidates, as their charts are looking weak even as the summer rally progresses
  • Remember that change starts at the margins and spreads to the core (learn more about this in our Global Macro course). In market terms this means that weakness in EM (EEM, EMB, FXI) often presages weakness in DM

Charts for this week’s report can be found in the slides at the beginning of the article.