• 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
• 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.