• US ETFs continue to push higher, with the SPY, QQQ, and IWM now testing, or close to testing, major resistance
  • XLI, XLP, XLF, and XLY have also rallied strongly

• EEM is still languishing even as US and EU equities rally
  • Remember that changes occur in 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 to ~$90, but this is still too high with macro conditions deteriorating all over the world

• Fixed Income ETFs are in a precarious position even with USTs rallying
  • TLT has broken out of its range, if it pushes higher, 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
  • With more macro markets moving into alignment, the probability of such a scenario is increasing

Trading Ideas – Performance

Trading Ideas – Commentary

• 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

• 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
  • Volatility in XLU has increased dramatically, with sharp falls and rallies. However, the net effect of both has been little underlying price movement, which is not good for our straddle’s profitability

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

• 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
• IWM remains vulnerable to deteriorating macro conditions, especially with how bearish 2022 has been for small cap equities
  • It is trading a fair distance away from the next major support level at 151.5 
• 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
• 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.