Hey There Income Hunter,
Sector performance last week left plenty of signs that stocks will remain entrenched in a bear market …
As you can see in the graph below, sectors that underperform in a slow growth, slow inflation environment – which is classified as a Power Income Stat 4 bear market – certainly are hurting.
Consumer discretionary and communication services that back-test as the worst performers in a Stage 4 bear market led the downturn last week.
There are a couple of sectors in the market that are performing counter to stage 4 expectations, though.
Government bonds are having the worst year in history. However, usually when the economy and stocks are entrenched in a bear market, risk-free government bonds perform well.
I talk about this frequently because what is unique in this bear market is the very high government debt levels and a strong dollar. Both anomalies are creating an enormous supply-vs-demand imbalance.
Energy on the other hand is the best performing sector – when it is usually a poor performer stage 4. In this case, the discrepancy is due to the similarity today to the 1970s inflation playbook as the world is dealing with a severe energy crisis.
I now envision a shift in sector leadership as we move ever so slowly to the end of the Fed’s tightening cycle.
Today, we’ll take a closer look and also run through this week’s data, Fed speakers and bond supply.
Ch-Ch-Ch-Changes
The biggest change last week was a collapse in growth vs. value stocks
It all started the previous week with poor earnings reported from the big boys of tech.
Check out stock performance since the earnings were reported:
AMZN -22%
MSFT -15%
META -35%
GOOG -20%
AAPL -15% … after rallying post earnings
10 days of destruction in growth stocks caused a breakdown of growth vs. value as you can see in the chart below …
The timing of this breakdown in tech at the end of the year means we may see a continuation of the sell off as investors take losses for tax purposes.
2022 is shaping up to be a huge tax selling season.
As you can see below, stocks and bonds are both down more than 20%:
Now, just when the consensus narrative has turned more positive on the market, we may get a puke into year end to lock in losses …
Consider Paired Long/Short Strategies …
The SPDR Select Sector Industrial ETF (Ticker: XLI) has been building momentum to the upside.
Since XLI holds aerospace and defense stocks, it also has the benefit of stimulus coming from the government.Geopolitical risks have many countries beefing up their defense and the US will as well.
Traders could consider buying a call spread in XLI to December and a shorter term expiry put spread or put fly in QQQs.
You want the premiums to match so you can make enough money on one side to pay for the other, so you own it for free.
Notice the XLI/QQQ ratio below. This is simply XLI divided by QQQ and it shows the relative performance between the two.
In a very low interest rate environment with passive investing constantly buying the big tech names, QQQs dominated for a decade …
Well that is all reversing and will continue to reverse for years to come as the world transitions to a high inflation environment and higher interest rates …
This trade also works well if you buy the SPDR S&P Metals & Mining ETT (Ticker: XME) versus QQQs.
This would be my preferred trade because I believe there is a decent chance gold will be included in the new monetary system and it could be revalued much higher in that scenario.
Here is the XME/QQQ ratio chart …
Bring It Home
The seasonals turn bullish for stocks in November but I have a feeling this year may be an exception due to tax selling and poor economic numbers.
So on any rally this week I like to set up these trades …
I would pull the trigger if QQQs rally to 270 but will adjust accordingly.
The Week’s News, Data and Supply
Key signposts this week are how the bond auctions go since they have a big impact on QQQs …
Also the Fed speakers in case they soften Powell’s statements, which could be supportive for stocks and bonds …
Have a great week and as always …
Live and Trade With Passion My Friend,
Griff