Hey There Income Hunter,
When the broad indexes rolled over last Friday, it felt like a turning point.
It felt very much like the short squeezers turned the ball over to the short sellers.
We will find out exactly how significant the downtrade is in the next couple of weeks.
The next critical event is Jerome Powell’s speech at Jackson Hole on Friday.
I think Powell will use this closely watched session to hammer home the point that he will continue to destroy demand in the economy to drive inflation much lower.
Powell’s intention is to show his determination to bring inflation down even though he knows he will be risking substantial short-term weakness in growth.
The minutes from the Fed meeting in July and follow-up message from Fed members attempted to recognize this risk while establishing that the point is to achieve maximum employment on a sustained basis.
Powell’s speech is a better place to deliver this message, and I think we’ll hear him be overly hawkish – because he does have a hidden agenda.
Today, I’ll share what that is – PLUS reveal a watch list of stocks rolling over that traders should jump on next week.
The Motivation Behind Powell’s Hawkishness
The Ghost of Fed Chairman Arthur Burns
In the early 1970s, Arthur Burns, who was the Fed chair at the time, insisted inflation was transitory and best ignored …
As a data junkie, he was more concerned about segmenting data than acknowledging the problems he faced as a monetary policy maker.
This was especially true during the emergence of what became the Great Inflation of the 70s, as the US was hit by a quadrupling of oil prices in 1973.
So, instead of fighting it, Burns fought to remove oil from the CPI calculation …
Then came a surge in food prices. Burn’s said it was due to unusual weather, so eliminated food from the calculation, as well.
That watered down the CPI calculation, and Burns didn’t stop there. By the time he was done stripping out everything he could, there was only 35% of the original CPI calculation left – but it was still rising at double digits!
It was not until 1975 that Burns finally admitted he was wrong, but it was far too late.
Powell, who is at an inflection point that will define his legacy, will do whatever it takes to avoid becoming the second coming of Arthur Burns.
He certainly does not need the money or headache involved with running the Fed, it is all about how he will be remembered in the long line of past Fed presidents.
What does this mean for you?
This means a very hawkish sounding Powell will put a wet blanket on the relief rally and probabilities favor a down trade that could last into the Fed’s meeting on Sept. 21.
The Most Vulnerable Sectors
Housing: Phoenix, Ariz.,is showing the second lowest home loan closings for the month of July EVER … On top of that, average month-over-month prices fell 7.4%. Phoenix is historically a good lead indicator.
I like shorting the iShares Home Construction ETF (Ticker: ITB) for housing. ITB mostly holds residential single family home construction and furnishing companies.
It is set up well for a momentum trade to the downside …
Notice that ITB broke below the old high (red dashed line) and is headed for the 50 dma at 57.40. Probabilities favor a break of the 50 dma and possible test between $50-$52.
iShares High Yield Bond ETF (Ticker: HYG)
HYG gave an early signal that stocks were getting stretched on the rally. It gapped below the 100 dma (purple line) on Friday and closed close to the lows.
A test of the 50 dma and May lows is next before hitting the horizontal support at $74.
Bring It Home
If the timing is, indeed, right for a renewed downtrend in stocks, it could happen fast.
Here are a few names to watch and jump on from the short side upon a break of key levels …
XLF – the bank ETF failed right at the previous high and Friday’s down trade was on good volume. I think we can expect a test of the 50 dma and possibly down to $32.
XLY – the consumer discretionary ETF is a favorite short during the bear market as consumers struggle to make ends meet and will sacrifice discretionary items.
SPY – SPY failed right at the 200 dma closed near the lows on good volume on Friday. The 100 dma at 408.50 is the first target on the downside.
Due to the change from bearish to bullish sentiment, the probabilities now favor a drop into the Fed’s meeting on Sept. 21.
Live and Trade With Passion My Friend,
Griff