Hey There Income Hunters,
Well, the bearish indicators we have been seeing in Invesco QQQ Trust Series 1(Ticker: QQQ) played out nicely with another big down day today.
I identified three technical indicators that were flashing RED …
- Bearish candlestick engulfing pattern
- Negative RSI/Price divergence
- Reversal day on higher than normal volume.
Today, we’ll take a look at how low we can expect to go — and a pair trade I put on yesterday.
High Yield Continues to Flash warning Signs for Stocks
As the broad indices have continued to grind higher in recent weeks, high yields have been weakening substantially.
This is a divergence that is critical for value-versus-growth flows.
This is the biggest weekly loss for junk bonds this year, and yields have risen to an eight-month high of 4.41%.
BBB and HY credit spreads are also leaking wider even as the 10-year hovers around 1.55-1.60.
These signposts are the most important leading indicators of funding stress in the markets.
The recent rally was completely dominated by FAANG stocks and this dynamic in the market is unsustainable.
As you can see below, the credit spreads are tightly correlated with VXX …
Both the high yield spreads and VIX could be turning the corner, projecting a trend higher for both in the near term.
IWM/QQQ Paired Trade
I believe one of the best trades for all of 2022 will be long value versus growth
That’s why I’m watching the iShares Russell 2000 ETF (Ticker: IWM) versus the Invesco QQQ Trust ETF (Ticker: QQQ).
Check out this spread on the charts and realize that when the “everything bubble” pops, this spread will reach the heights of 2008.
Just think about it this way, for the ratio to go to 1, IWM would have to rise $70 while QQQ stayed the same.
In 2008, the spread was 1.8 in favor of IWM and that would mean a total net profit of $180 on the trade.
We have seen days where IWM was up and QQQ was down. That is the beauty of paired macro trades: you can make money on both sides.
Bring It Home
Jerome Powell’s reappointment has given us an incredible opportunity to set up trades for the first half of next year.
Powell staying at the Fed does not change anything and, in fact, he was simply used as a negotiating chip to get Sen. Joe Manchin’s yes vote on the reconciliation bill.
Biden will now fill the other three vacqant seats with dovish replacements and the Fed will still become an extension of the administration instead of the independent entity it was meant to be.
This is all super bullish for real assets and value over growth. Stay with the program!
And as always …
Live and Trade With Passion My Friends,