As you can see in the chart below, the weak economic surprises have broken below zero. This is the reason many banks are revising their GDP forecasts down for the coming quarters.
Chart via Bloomberg.
Meanwhile, inflation is expected to stay high for the next few quarters, so trading against this backdrop of stagflation is critical to maintain an edge.
The top performers for a stagflationary environment are real estate investment trusts, utilities and energy.
Over the weekend, I wrote about buying the Real Estate Select Sector ETF (Ticker: XLRE).
Today, let’s look at the Energy Select Sector ETF (Ticker: XLE), which is not only in a strong low risk/high reward setup but also throws off a 4.3% dividend …
The 4.3% dividend is HUGE for investors when stocks and bonds throw off less than 2% annual fixed income.
You have to own energy stocks, and here’s why:
- With a more aggressive push for vaccinations globally, we will see an increase in driving and flying in the months ahead. That will lead to higher oil prices and wider profit margins for producers, transporters and service providers.
- Supply will decline as governments incentivize car buyers to switch to electric vehicles. At the same time, there will still be a minimum of 400 million gas powered cars on the road for the next 5 years.
On the Other Side of the Coin …
Financials are a sector you want to sell in a stagflation environment.
Let’s take a look …
SPDR Select Sector Financial ETF (Ticker: XLF)
Banks struggle in a stagflation environment and the current circumstances are especially difficult on banks for a few reasons:
- The current administration is tighter on regulations, making it more difficult for banks to make money …
- Long-term interest rates are outperforming short-term rates, which narrows the profit margin on banks’ mortgage business.
- The digital finance revolution will reduce the need for banks to intermediate between counterparts in the financial world.
Let’s see what the XLF technicals are telling us …
Look for a break of the 50-day moving average in XLF to initiate bear option strategies.
We will see an extended rotation away from financials into energy and commodities in the months ahead
Bring It Home
I think we will see the big boys re-enter the market this week.
Fed tapering is an even higher probability now after reports this weekend cited Fed officials preparing for a November reduction of $15 billion in quantitative easing each month.
This could spook equities early in the week,
creating opportunities to trade volatility into expiration on Friday …
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Live and Trade With Passion My Friends,