ETF Edge – Trading Opportunities In ETF Markets
What good trading opportunities exist in the ETF space right now?
ETF Edge keeps you up to date with our views and trading ideas.
Summarized and presented to you in charts!
Watch The Dollar & US Rates As Credit Suisse May Fail
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Trouble in the banking system has very quickly metastasized from the failures of regional banks, Silicon Valley Bank and Signature Bank, to hit a globally systemic important one, Credit Suisse.
Systemic risk is obviously a major concern now, which is best observed and indicated in two macro markets, the USD and US rates.
Pay very close attention to what they are doing!
- While each bank has its own individual issues that contributed to their problems, the common underlying factor determining their fate is the same – the global repo market (as explained in our article on SVB)
- Systemic risk is obviously a major concern now, which is best observed and indicated in two macro markets, the USD and US rates
- The main indicator to watch for is an alignment in these two markets, where both move together in a direction which signals deteriorating conditions in the global financial markets. This specifically means a stronger USD, and lower US rates
- The more important macro markets, like oil and base metals, that line up in the same direction, the more danger of a global crisis and selloff
- Currently, US rates have begun to move sharply lower, but the USD has yet to breakout of key levels
Charts for this week’s report can be found in the slides embedded at the beginning of the article.
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How To Make Money In Uncertain Markets?
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Recession or no recession?
This is the crucial question that traders are grappling with at the moment. Naturally, how you answer the question will determine how you position your portfolio for the months ahead.
But what if you simply want to wait for the markets and/or data to give a clearer heading? Waiting and not trading is certainly one way to go, but so is taking non-directional positions.
- Markets are not fully aligned towards a weaker global economic environment (do note that they were fully aligned and indicating a global recession as recently as October 2022)
- Weaker USD in short term, but the medium term trend is still biased towards strength
- Same in US equities, medium term weakness, but short term strength
- Commodities also aren’t aligned. Oil and Aluminum remain range bound, while Copper and Iron Ore have rallied strongly since Oct ‘22
- When the Fed starts to cut rates in response to a slowing economy, expect lower short term and long term rates, but also lower prices in risky credits as investors pay more for safety and liquidity
- Hedge market risks:
- Not a good time to take directional risk in markets. Short term trends are not aligned with medium term trends in key markets, which makes the future direction of global markets unclear
- Given the current uncertain macro environment, what characteristics should we look to add to portfolios?
- Preferably, positions which are relatively:
- Stable
- Low risk
- Non-directional
- And also offer some sort of yield
- Long 1 month or 3 month US Treasury Bills
- Fed controls the short end of the curve, and long term rates are not pricing in levels of growth driven inflation commensurate with the Fed’s hikes; hence massive curve inversion
- Buying bills in this uncertain environment gives:
- Higher yields than buying at the long end
- Flexibility to roll them over every 30 or 90 days, without having your capital locked up for longer should market conditions shift rapidly
- Buying longer term Treasuries at this point for the sake of yield will:
- Lock up your capital should their short term trend reverse and prices fall, saddling you with a capital loss
- Give you a lower yield
- Represent a directional bet, even if their prices continue to rise (giving you a capital gain along with yield)
- US 1 month Bills are currently trading with a yield of 4.56%, and 3 month Bills at 4.67%. US 10y Notes are trading with a yield of 3.55%
- These trades are non-directional, but more aggressive in terms of cost and the risk profile of the asset classes involved
- Long SPX, hedge with ATM 1y put
- Gives upside exposure if equities continue to rally, guards against downside crash if downtrend resumes
- SPX (S&P 500) is currently trading at 4136
- Straddle (buy calls and puts) on risk assets, which will profit should markets begin to trend strongly in one direction. ATM straddles on:
- SPX, NASDAQ, Russell 2000
- NASDAQ Composite is trading at 12006, and the Russell 2000 at 1985
- USD, via the most liquid currency pairs – EURUSD, GBPUSD, AUDUSD, USDCAD, etc.
- EURUSD is trading at 1.0795, GBPUSD at 1.2066, AUDUSD at 0.6930, and USDCAD at 1.3406
- SPX, NASDAQ, Russell 2000
- More importantly, these trades allow:
- Exposure to both sides of the market during this uncertain time
- Flexibility to reduce exposure to one side should markets begin to trend strongly in one direction
Charts for this week’s report can be found in the slides at the beginning of the article.
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Bearish To Bullish In A Week? ETF Trading Opportunities
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Markets have gone from looking bearish to bullish in the space of a week. However, medium term trends remain bearish.
How will this bounce end?
- 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.
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Go Up Together, Go Down Together. ETF Trading Opportunities
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Last week’s Jackson Hole meeting has injected some downside volatility into equity markets, pushing the summer rally into reverse.
- The summer rally has begun to reverse, with large sell offs as markets react to Jackson Hole
- SPY, QQQ, and IWM have now broken below major support levels
- Continue to pay attention to EEM. If it breaks 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 could be headed for a test of its current cycle highs. Oil prices are back in the mid $90s, but this is still too high with macro conditions deteriorating all over the world
- XLU has come down from its all time high in tandem with the broader market selloff
- Fixed Income ETFs are in a precarious position
- TLT has fallen back to the bottom of its range. 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
- 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
- Entered a straddle on XLU at a strike of 72, expiry Sep ‘22
- Position will be profitable if XLU makes a decisive move in either direction
- XLU has rallied back to all time highs, and if it continues to push higher from here, will drive our straddle into the green
Trading Ideas – Long
- A straddle on XLU is an increasingly interesting prospect
- Consolidating between critical support and all time highs, which way will it break?
- Straddles are expensive, but will allow us to profit as long as the market makes a decisive break
- With global macro conditions deteriorating, and energy prices remaining sky high, XLU will have to move in one direction or the other
- Consolidating between critical support and all time highs, which way will it break?
- 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.
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Is The Rally Fizzling Out? ETF Trading Opportunities
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The rally in US equities has finally taken a break with some heavy selling.
Does this herald the end? Keep watching EM assets closely.
- The rally in US stocks has hit a brick wall, with large sell offs across the board
- SPY, QQQ, and IWM have tumbled back to testing major support levels in the space of a week
- Continue to pay attention to EEM. If it breaks below its recent range, it could signal the end of equities’ summer rally
- Remember that changes occur at the margins first, then spread to the core. EM weakness is a warning sign that DM equities are not out of the woods yet
- Energy stocks (XLE) remain way off their peak, and look like they have made their cycle highs. Oil prices are back in the low $90s, but this is still too high with macro conditions deteriorating all over the world
- XLU has come down from its all time high in tandem with the broader market selloff, although natural gas prices remain firm amidst very strong global demand given the weather and Russia’s war
- Fixed Income ETFs are in a precarious position
- TLT has fallen back to the bottom of its range. 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
- 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
- Entered a straddle on XLU at a strike of 72, expiry Sep ‘22
- Position will be profitable if XLU makes a decisive move in either direction
- XLU has rallied back to all time highs, and if it continues to push higher from here, will drive our straddle into the green
- Stopped out of IWM at 178.5 for a profit of 1.11%. Will look to re-enter if it breaks lower again
- High beta small cap stocks are primed to suffer heavy losses given equities’ bearish trend, and deteriorating macro conditions
Trading Ideas – Long
- A straddle on XLU is an increasingly interesting prospect
- Consolidating between critical support and all time highs, which way will it break?
- Straddles are expensive, but will allow us to profit as long as the market makes a decisive break
- With global macro conditions deteriorating, and energy prices remaining sky high, XLU will have to move in one direction or the other
- Consolidating between critical support and all time highs, which way will it break?
- 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 current rally makes it inadvisable to take a short position now. We will have to wait until IWM realigns with weakness in other macro markets again (if it does)
- 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
- HYG’s outperformance of LQD seems to have lasted for just a week, and EMB has fallen back into its old range again
- 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
- 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.
Do You Want To Make Money Trading?
Learn how to, and more, in our Trading Courses.
