Critical Charts for This Week

Hey There Income Hunters,

This is a critical week for the markets.

First, the consensus narrative for transitory inflation has been put to rest recently, … while growth has been slowing and the labor market took a hit on Friday as non-farm payrolls were much weaker than expected …

Meanwhile, stagflation is muscling up.

Notice the chart below illustrating the diverging trends of economic surprise trending lower while inflation surprise continues trending higher …

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I have been talking about stagflation for many months, and I think we will see it become the consensus narrative in the weeks ahead.

Stagflation is not a common economic condition and not many Americans understand its impact on the economy.

Today, I will show you the trades to watch for as signposts as to where the money is flowing so you can stay ahead of the crowd and make quick profits.

Watch These Levels on the US Dollar Index (Ticker: DXY)

There has been confirmation of economic deceleration in the US over the past few weeks, with retail sales declining and the Atlanta Fed revising down real growth (GDP) in Q3 from 5.3% to 3.7% …

Meanwhile, Japan and other Southeast Asia economies are expected to get a nice economic boost, as Delta variant cases have peaked and they have been under more strict lockdowns than the US.

This relative change in growth will put pressure on the dollar — which I have been very bearish on, and continue to be.

We are approaching big levels on the dollar, and if they are broken it will trigger renewed selling and much lower levels into the year’s end:

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Watch for Breakout on Physical Gold (CFDs on Gold)

Keep your focus on gold because it is a huge winner in a stagflation scenario — especially when the Fed is choosing to take their policy cue from full employment as opposed to higher inflation.

With the employment situation uncertain, the Fed will sit back for a few weeks and monitor economic data …

This could attract an allocation into gold and a breakout of the $1,837 level is the signpost to monitor.

On a break of $1,837, we could see a quick acceleration of the recent rally and a test of $1,920 — and ultimately $2,089 — by the end of 2021:

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Since the weekly bullish hammer candlestick pattern in early August, gold has made three new weekly highs … 

I will be adding to my bullish metal positions when gold makes a higher high above $1,837, signaling a reversal of the downtrend since May.

A breakout would be significant for the markets and could force allocations out of other asset classes, like bonds, into Gold.

iShares Treasury 20+ Maturity Bond ETF (Ticker: TLT) 

Adding to the importance of this shortened holiday week is the Treasury’s issuance of $20 billion of bonds.

Investor’s will be bidding to buy $58 billion in 3-year notes (Tuesday), $38 billion in 10-year notes (Wednesday) and $24 billion in 30-year bonds (Thursday).

The bonds are most important to watch because they will signal just how bad the economy really is.

Higher inflation puts tremendous pressure on bonds when the rate of inflation is higher than the return on bonds, as it is now.

However, if the economy is headed towards recession, bonds will rally in anticipation — and that will quickly reduce inflation.

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Trade Alert: I have 149/147 bearish put spreads to Sept. 10 on TLT, and I think we could see $146.5 this week.

Even lower levels would be an indication that investors anticipate stronger growth ahead as the reopening of the economy picks up speed.

Bring It Home

Bonds, precious metals, and the dollar are the most significant macro drivers of the markets. 

Bonds are especially important for forward-looking signals on the economy.

Stock prices have never been a great forward looking- signpost and, usually, equity investors are blindsided by a sharp turnaround in the market

See the 2008 financial crisis and the dot-com bubble bursting for evidence on that.

Drop me a line this week with questions or comments!

Trade and Live With passion My Friends,


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