Black-Eye Friday Hits Markets

Hey There Income Hunters,


Another Covid variant crushed markets on Friday as every sector closed lower during the less-liquid shortened session.


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The S&P 500 Index (SPX) closed down 2.27% Friday. Volume equaled the average daily volume, even though the index closed three hours earlier than usual. 


I have been revealing plenty of danger signs for the market lately, including Bond Vol Spike and Covid resurgence


Today, we’ll take a look at what to watch for this week and where the opportunities are as we head towards Christmas. 


S&P 500 Index ETF (SPY)


One of the most important market signals to pay close attention to is when highly correlated relationships diverge from one another … 


That is what I have been writing about the past couple of weeks as the breadth of the stock market has been flashing plenty of warning signs. 


Check out the down trend in the S&P 500 stocks that have closed above the 50-day moving average.

 

The number of stocks closing above the 50 DMA indicator was trending down even as SPY was making all -time highs. 


Now, that is a warning sign just waiting for a catalyst and we certainly got one on Friday


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SPY should continue to trade lower in the short-term, but the 50 DMA (451.50) and the September high near 454 provide a good area to get long for the Santa Claus rally into year’s end.


iShares 25+ Maturity Treasury Bond ETF (Ticker: TLT) 


I have been waiting patiently for an opportunity to put on a bearish TLT trade and it looks like we will get it this week.


As you can see on the TLT graph below, the 152 area is the top of the six-month trading. I will start setting up bearish spreads this week as we head into the second week of December …

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The second week of December brings the November CPI number and record Treasury bond issuance.  


The fear of another strain of Covid is not going to derail the inflation picture but it may cause central banks to back off an inflation fighting policy. That is bad for bonds and bad for TLT. 


SPDR Select Sector Financial Fund ( XLF)


Even though the banking sector, measured by the XLF, was down over 3% on Friday, XLF should get a boost from a renewed Covid variant.


Slower growth will precipitate a steeper 2-year to 10-year Treasury bond yield curve spread, which is positive for XLF prices. 


A steeper yield curve builds more profit margin for banks because it allows them to still borrow at close to zero rates and lend at higher rates. 


I will look to put on a bullish XLF strategy if prices retest the low from Friday at $33.30.

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Bring It Home


I think the Covid scare is a bit overdone, and Friday’s moves are an opportunity to build on my longer-term themes, including opening long trades in energy and metals and shorts in TLT and LQD. 


The new drugs and continued vaccinations will help put Covid behind us in 2022 and each new variant will have less of an impact on the overall market trends.


This week’s action may test the lower levels of Friday, but that is an opportunity to buy, and I’ll be alerting subscribers of the lowest risk/highest reward trades to consider. Until then …


Live and Trade With Passion My Friends,


Griff

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