Hey There Income Hunter,

 

I’ve been waiting for the specific opportunity I’m going to reveal today, and now that it’s here I’m going to truly relish it.

 

Here’s what I mean …

 

Long-time Power Income readers can tell you that I hate bank stocks longer-term.

 

It’s mostly because of how badly the banks deceived and robbed regular Americans during the 2008 housing crisis – OK, I just wanted to say that because it’s true and it still gets me steamed …

 

What I really mean is, in my opinion, bank stocks are OVERRATED.

 

I get the fact that the market may be looking beyond Fed tightening and toward a return to quantitative easing, but it is way too soon to think along those lines.

 

I see an opportunity to short the banks based on the yield curve flattening – and how much more I think it will flatten. That has historically been a key indication for where bank ETFs should trade.

 

Today, I’ll look at past performance of banks when the Fed went into a tightening cycle and share with you a good short-term play in the sector. 

 

Trade the Stages of the Market

 

I hope you had a chance to see my session at the Option Pit Tradefest event on Thursday. 

 

I presented the Power Income System, which is designed to anticipate Fed and US government policy so you can front-run and capitalize on our central bank’s flows … – which account for 50% of total market flows!

 

Now, understanding the stages of the market is critical for your trading, so read closely below …

 

Four Stages of the Market:

• • • Stage 1 – is slowing inflation and accelerating growth. It's a balanced stage favoring long cyclical positions and shorting consumer staples and energy since inflation is decelerating.
    • Stage 2 – is accelerating growth and accelerating inflation. This is the killer stage where commodities and energy stocks rip higher. It’s also great for shorting bond ETFs.
    • Stage 3 – is accelerating inflation and slowing growth. This is the stagflation stage which heavily favors gold, energy and commodities while shorting financials, REITs and telecom.
    • Stage 4 – is the deflationary stage where both growth and inflation decrease. Bear markets and recessions are born in Stage 4. Preferred longs are gold and defensive plays like staples, utilities and healthcare. Shorts are financials, tech and consumer discretionary. 

 

Stage 4 Is Upon Us and Financials Are a Good Short

 

Check out the chart below illustrating the Stage 4 market in 2018 and how badly financials traded. 

 

 

Notice how in 2018 – during the Fed’s last QE tightening period – financials were a great sale during the whole year.

 

Well, I believe in H1 2022 the market will trade in Stage 4, so that is why I am bearish banks. 

 

In the short-term what I see is diverging trends between banks Financial Select Sector SPDR Fund (Ticker: XLF) and the yield curve. 

 

XLF Price Trend With 2yr/10yr Curve Spread

 

This is important to understand because the yield curve is such a critical signpost for trading and investing.

 

The correlation between the slope of the yield curve and bank ETFs is high and currently there is  a sizable divergence from the level that XLF is trading and the 2-year/10-year curve spread.

 

Lastly, the technical picture on XLF shows a strong tendency to reversing its current trend.

 

Here is a picture of the XLF weekly chart. Notice the weekly price/relative strength index divergence that is a reliable reversal pattern:

 

 

This is an easy trade because if XLF can close above last week's high I would close the trade. 

 

Bring It Home

 

With the Power Income System policy gauge and sector allocations for each, trading becomes much simpler.

 

You just focus on buying the preferred longs on the dips and selling the preferred shorts on resistance. 

 

>> See how here. <<

 

Risk management is simplified, as well, if you use stops when trades go against you and trailing stops when you have a winner.

 

Bear markets move fast, so cutting your losses and running with profits is most important. When you are wrong, get out and move on to the next one.

 

And, most importantly, ignore the general consensus because by the time the media admits we are in a bear market it will be too late to sell. 

 

Live and Trade With Passion My Friends,

Griff