• 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
• 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.