Blood Bath And A Big Bounce: ETF Trades You Must Know #4
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Monday saw a blood bath in markets which was followed by an even larger bounce. Could this mean that the bottom is in for equities?
Blood Bath & Bounce… On The Same Day!
- Monday saw sharp sell offs across a broad swath of markets, followed by an even bigger bounce
- US small caps have finally broken out of their range (to the downside), and are now in a clear downtrend
- Sector performance continues to diverge
- Financials (XLF), Energy (XLE), and Consumer Staples (XLP) remain bullish
- Tech (QQQ), Consumer Discretionary (XLY), Real Estate (XLRE), and Utilities (XLU) are looking increasingly weak, although they remain in broader uptrends
- Corporate bonds, LQD and HYG, still look like they are heading lower
- Emerging Markets equities (EEM) and sovereign bonds (EMB) are looking very bearish
- Yesterday’s sell off and bounce will have many asking if the bottom is in for equities. Here are some points to consider:
- A simple technical rule of thumb – a market closing higher the day after putting in a possible low is considered to be a confirmation signal. That is, Tuesday’s close > Monday’s close
- If you want a stronger signal, look to see if Wednesday’s close > Tuesday’s close > Monday’s close
- Consumer staples stocks (XLP) continue to outperform consumer discretionary ones (XLY) even as the Fed grows increasingly hawkish
- The USD remains strong, and the US yield curve is flattening!
Trading Ideas – Long
- XLE to take advantage of how bullish oil prices are
- XLF if you buy into the narrative that rate hikes are good for bank stocks
- If you don’t, most traders do, and would be looking to position themselves accordingly
- Regardless, XLF is trading in a very bullish manner
- XLI is starting to look like a decent bet
- Is currently more defensive than XLU, especially with traders following the “higher rates = utilities less attractive” narrative
- Retains upside potential from stronger economic growth
- XLP is an interesting bet which could offer the best of both worlds
- Defensiveness against current sell off and market volatility
- Upside potential from very bullish trend
Trading Ideas – Short
- EEM is trading in a well established bearish channel
- Rallied in early January, but has now given back all its gains
- IWM has broken below its range, and is now in a clear downtrend
- This could be a good short if you do not think a bottom is in for equities, or if you simply want to follow the trend
- Buying IWM puts is another way to express this view which would also allow you to take advantage of a possible spike in volatility
- LQD, HYG, EMB, TLT
- The entire fixed income ETF space looks like it’s headed lower as rates (and their expectations) keep rising
- EMB looks the weakest technically
- XLY is struggling, and now that IWM has broken out to the downside, it’s hard to imagine XLY doing well
- Could hedge a XLY short with a XLP long to create a pair trade that still makes money if XLY falls, and loses less if XLY changes direction
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