• US ETFs continue to rally, with the SPY, QQQ, and IWM all breaking above major resistance, and all major sectors bullish except for energy
  • XLI, XLF, XLRE, and XLY have also rallied strongly

• Energy stocks (XLE) remain way off their peak, and look like they have made their cycle highs. Oil prices are in the high $80s, but this is still too high with macro conditions deteriorating all over the world
  • XLU is making new all time highs, with natural gas prices firm amidst very strong global demand given the weather and Russia’s war

• EEM has only rallied slightly and is effectively still languishing, even as US and EU equities 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

• Fixed Income ETFs are in a precarious position even with USTs rallying
  • TLT’s break above its range has failed. If it pushes higher and manages to break decisively, be prepared for more turbulence in markets
  • EMB (Emerging Market USD denominated debt) has rallied strongly, but should it turn down again, it will indicate that the global USD shortage is getting worse, pointing towards further sell offs (its medium term trend is very bearish)
  • 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
  • However, HYG has begun to outperform LQD, which could hint at a shift towards more risk taking in the market

Trading Ideas – Performance

Trading Ideas – Commentary

• 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 

• Stopped out of EMB at 87 for a profit of 3.33%. The fundamental and technical basis of the trade still holds, we are looking to re-enter the position if it breaks lower
  • 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

• 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
  • Like IWM, it is inadvisable to enter shorts now, and a wait-and-see stance is required, especially if HYG continues to outperform LQD
• XLE looks like an increasingly attractive short
  • Global economic conditions are rapidly deteriorating
  • Oil prices are tumbling 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.