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