Hey There Income Hunters,
The bond market is going bonkers.
In 40 years of trading, I have rarely seen this situation occur.
Bond volatility made a new high yesterday while equity volatility came off (but did not make a new low).
This divergence between stocks and bonds is a very important signpost for what may come …
Today I’ll break it down and consider a low risk/high reward trade that makes sense based on history …
Central Banks Are Removing the Punchbowl
The most unstable part of the economic cycle comes when central banks are unable to continue to provide stimulus for a weak economy due to high inflation.
Well, here we are …
- We are not seeing real economic growth even with all the trillions of stimulus injected by the Fed and the US government.
- Inflation has reached levels that can cause demand destruction in the economy because costs are rising so quickly.
- The reopening trade could fizzle quickly before the Fed even begins its QE taper program.
The bond market is sending a very important message.
Bond Vol Is Rising While Stock Vol Is Sinking
Notice in the graph below we have financial asset volatility (stock and bonds) going in separate directions …
Notice that in the past when they diverged, five out of six times stock volatility rose to catch up.
And it may again as we meet the uncertainty coming out of Washington.
The instability of short-term rates can be a destabilizing factor that triggers a correction, as well.
Short-Term Interest Rates Soaring
Australia, Germany, UK and US rates are all rising.
This is the market actually tightening for the Fed
Check out the probabilities for a Fed rate hike priced in now ….
The markets have a way of forcing the Fed’s hand … which could end up being the big mistake that would trigger a serious correction in the equity market.
Consider a SPDR S&P 500 (Ticker:SPY) Put Spread
If you are looking for a low risk/high reward hedge or bet on a minimal correction check out this one:
Purchase $SPY Nov. 19 455/454 Put Spread for $.29.
This trade offers a good opportunity to maximize your return if SPY settles below the 454 strike on Nov 19.
The trade would return 250%. (That’s the difference in strikes (100), minus your cost (29) and divide that by your cost.)
I am going to put a few on today.
Bring It Home
I continue to find little signs of instability showing up in the market.
We are in a critical time
While the seasonal factors for stocks are strong, we could easily get a quick spike down and could close the trade out — potentially doubling your money.
I’ll monitor for additional signs, but In the meantime stay ready to jump on a breakdown in stocks or a breakout in the precious metals.
And as always …
Live and Trade With Passion My Friends,