Hey There Income Hunter,

Well, the Fed did it again.

Sensing a vulnerable market early last week, it had the most hawkish Fed president James Bullard, of St. Louis, talk up 2023 rate cuts instead of the coming hikes.

That, along with a little help from a VIX expiration that forced dealer short covering, sent the SPX soaring almost 9.15% from the May 21 low (3,810) to last Friday’s high of 4,158.

Now, while the technicals favor a continued surge, in a global macro driven market environment, bear market rallies can reverse very quickly.

Tape bombs and/or bad news headlines will derail the bulls. And there are plenty of both lurking.

Today, let’s lineup a watchlist of stocks to buy/sell in the week ahead.

Soft Spots

Housing

The National Association of Realtors (NAR) announced their pending home sales report, a key forward looking number, last Thursday.

In this environment we MUST pay close attention to forward looking economic reports, because we know the Fed will only react to PAST economic data.

Looking ahead allows you to front run the Fed and have a high probability of success since your decisions are based on the future NOT the past.

So, The NAR announced that pending home sales fell 3.9% in April, with YoY sales falling 9.1%. This was the sixth-straight monthly drop. 

NAR’s chief economist said escalating mortgage rates and steeper prices have bumped up the cost of purchasing a home by more than 40% from a year ago. 

Homebuyers may be forced to rent instead of buy, but rents are rising, as well. That means housing is forcing consumers to take on more debt as their real, inflation-adjusted wages continue to decline. 

The Jobs Market

This earnings season many companies have announced plans to cut back on hiring.

According to the Layoffs.fyi tracker, a report analyzing 723 startups, more than 125,000 employees have been laid off since mid-March.

We know layoffs are coming from Big Tech companies like Amazon, Meta, Netflix and Apple, who have all mentioned layoff during Q1 earnings calls. 

And we’re expecting the same from large retailers (Target, Walmart) who had very poor Q1 earnings paired with announced increases in inventories.

So, with the Fed’s plans to raise interest rates sharply in the months ahead, layoffs are expected to begin rising more steadily.

You see, the Fed has no choice but to react to the most backward data of all. In every business cycle, the jobs market is the last to change, meaning in a growth cycle it weakens last and in a weak cycle it grows last. 

The Fed thinks they are fooling us by constantly saying how strong the job market is, but it means nothing at this stage of the cycle. 

The forward-looking consumer data and earnings guidance is most important – and on both counts that data is signaling recession. 

The bears will win this battle and the reversal of this bear market rally can come at any time and in dramatic form.

Bring It Home

What to Sell

The sectors in most trouble heading into June are retail and consumer discretionary. The ETFs to consider bearish strategies are the SPDR Select Consumer Discretionary Sector ETF (XLY) and SPDR Select Retail ETF (XRT).

ETFs are a better choice than single stocks … This is because a crashing illiquid market makes it very difficult for market makers to liquidate the underlying holdings. At that point, market makers will only buy the ETF at a deep discount to its parts. So, the ETFs can become much cheaper than the sum of its parts. 

What to Buy

The purchase now is the dollar, which means buy the Invesco USD bullish ETF (UUP).

Here’s why …

Jerome Powell will be huddling up in the Oval Office today with President Biden, who will be demanding a more aggressive inflation fight. 

Biden’s only hope is to prove to Congress (specifically Joe Manchin) that they will do anything to reduce inflation. This must happen in order to move forward on any legislation. 

That message, with confirmation from Powell, will give the dollar a nice boost after correcting 3.5% over the past couple of weeks. Consider purchasing a bullish option strategy on UUP into July.

This will be a most interesting week.

Live and Trade With Passion My Friend,

Griff