Get Ready for the Taper Tantrum

Hey There Income Hunters,

 

A November start to Fed tapering is closer than ever to becoming a reality. 

 

The strong retail sales number on Friday (+.7%) and a surge in stock prices — +3.2% from the low and 1.8% for the week — are more than enough for the central bank to pull the trigger.

 

Meanwhile, covid cases plummeting and all the critical systemic risk pointing to a very strong US funding market.

 

Forget merely gathering for Christmas, it’s time to start thinking about a holiday rally that gets us to new highs and beyond.

 

As I have said for a while, Q4 will be stronger than the market has been expecting and it may be possible for the S&P 500 to reach 4,800.

 

The key for you to maximize profits will be to buy the right sectors.

 

Today, I’ll run through which ones will lead the way and others you can look to sell …

 

Phase 2 in Q4

 

As I have written previously, massive returns require you to get the economic conditions — what sectors to focus on — correct.

 

There are four phases to the market …  

      • Accelerating Growth & Deceleration Inflation (Goldilocks) 
      • Both Accelerating Growth & Inflation (Hot Economy)
      • Slowing Growth & Accelerating Inflation (Stagflation)
      • Slowing Growth & Inflation (Recession) 

The economic conditions for Q4 are clear — we will see accelerating growth and inflation.

 

This is similar to what we saw in Q2, which then turned to slowing growth and accelerating inflation in Q3.

 

What’s the difference? Let’s take a look.

 

SPDR Select Sector Utilities ETF (Ticker: XLU) 

 

Utilities fit into the category of interest rates because they distribute dividend income.

 

So, when growth and inflation are rising, utilities underperform because your dividend income will not keep up with inflation and they don’t offer growth or momentum to compensate.

 

Notice the chart below and see how during the months of April to June, utilities sold off.

 

However, as we transitioned to Q3, growth started slowing and money was reallocated into utilities as a defensive play during the slowdown …

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You had an opportunity to buy XLU in June when it was oversold and sell it in September when it became overbought … Now I would expect XLU to go sideways-to-down into year’s end.

 

However, If XLU were to take out the lows in the weeks ahead and it forms a positive price/RSI divergence I will be a short-term buyer.

 

SPDR Select Sector Financial ETF (Ticker: XLF) 

 

Longtime readers will know that financials perform well in rising interest rates environments.

 

Phase 2 accelerating growth and inflation is a powerful combination for rising interest rates, so XLF performs extremely well in phase 2 …

 

The other metric that is supportive for banks is how strong the corporate balance sheet is.

 

Even with all the pressure on spreads in China due to their property market woes, the US spreads have remained at their all-time narrow …

Chart, histogram Description automatically generated

 

And as you can see in the chart below, XLF soared to new highs last week as stocks and interest rates have risen. I expect to see a further rise in interest rates, which will be supportive for XLF.

 

However, I would look to sell XLF once the debt ceiling and spending bills are passed.

 

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With phase 2 locked in here are the other sectors to buy and sell.

 

In particular there is one to buy.

 

Andrew Giovinazzi and Frank Gregory will reveal what it is this Wednesday starting at 8 p.m. in their special Capitol Gains: October Surprise live event.

 

Bring It Home

 

The goal of Power Income is to maximize your returns in all economic conditions … In order to gain the consistency of returns, you must understand the environment you are in and how Fed policy may respond.

 

I felt early on Q4 would be a stronger growth quarter than the consensus was forecasting. Being right on that allowed me to make excellent gains in the past few weeks.

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Stay tuned here for more. Have a great week and as always …

 

Live and Trade With Passion My Friends,

 

Griff

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