ETF Trades You Must Know: Trading Opportunities In Rates
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The best trading opportunities look to be in the fixed income ETF space as rates continue to rise, and equity markets struggle for direction.
- Fixed income ETFs sold off as UST yields broke above 2% last week, and look increasingly vulnerable to further sell offs
- Major US indices may be in the beginning stages of consolidation
- Sector ETFs largely mirror what the major indices are doing, although to different degrees
- Financials (XLF), Energy (XLE), and Consumer Staples (XLP) remain bullish
- Consumer Discretionary (XLY) and Real Estate (XLRE) not so much, although they remain in broader uptrends
- Corporate bonds, LQD and HYG, have moved lower and look primed for larger sell offs
- Emerging Markets equities (EEM) and sovereign bonds in particular (EMB) continue to look bearish
- 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 has gotten even flatter!
Trading Ideas – Performance
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
- LQD, HYG, EMB, TLT
- LQD and HYG look poised for a large move lower, possibly all the way to COVID 2020’s lows
- EMB also looks set for a large drop
- TLT looks increasingly likely to test its Mar ‘21 lows at $133
- 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
- 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
- EEM is trading in a well established bearish channel
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