Hey There Income Hunter,

 

Flexibility is extremely important in trading.

 

News moves fast and trends reverse for seemingly no reason at all.

 

So you need to be able to shift strategies to go with the flow.

 

This is especially true in 2022, as the Fed tightens into a slowing growth and inflation environment. 

 

Here is an example from 2018 on how fast the Fed’s policy can shift. Speaking after the Fed had tightened aggressively for months already, Jerome Powell said this:

 

The really extremely accommodative low-interest rates that we needed when the economy was quite weak, we don’t need those anymore. We are gradually moving to a place where interest rates will be neutral. We may go past neutral, but we’re a long way from neutral at this point, probably.

 

Powell made this statement after eight .25% rate hikes, and he was signalling potentially would have to go higher.

 

Guess what?

 

That day was the peak in stocks and after that they dropped 20% in less than three months. 

 

Today, we will look at the signposts that will warn you of an imminent collapse and what the Fed may do to keep the financial system intact.

 

Click here to protect your wealth.

 

Signposts of a Bear Market

 

Interest Rates: A reversal of the 40-year downtrend in interest rates would trigger a meltdown in stocks. This is because the public and private sector are loaded with debt and higher rates would cause a debt crisis. 

 

However, the Fed could cap interest rates at levels that would allow companies and households to maintain their debt load. This is a simple task using QE to buy bonds from banks. 

 

Corporate Tax Hikes: Corporate tax rates have been in a downtrend similar to interest rates, which has also contributed to higher stock prices. However, political and public sentiment have shifted and higher tax rates would also put a lot of pressure on stock prices. 

 

Antitrust Regulations: Mega-cap stocks have led the way throughout the current bull market. However, the tide is shifting as bipartisan support to take antitrust measures against tech companies is increasing. Keep an eye on news – and Frank Gregory – in this area.

 

Commodity Supply/Demand Imbalance: If the supply/demand balance continues in the direction of overwhelming demand for commodities, this could squeeze corporate margins and their equity valuations. 

 

Bear Markets Present New Opportunities

 

Bear markets can really spook investors but in reality they also present excellent opportunities . 

 

Reallocating to sectors that will outperform is an early step you can take to reduce your draw downs as the broad large cap indices correct. 

 

Think high dividend names using covered call strategies that will defend your position on the down side while you collect dividend distributions. You also want to apply a dollar cost average strategy so if your stock does go down your cost basis is improving along the way. 

 

Low-beta, meaning stocks that lag the performance of the benchmark index, and low-volatility stocks will outperform in bear markets. 

 

Sectors to buy on dips include:

 

• • • Consumer staples (XLP)
    • Real Estate Investment Trusts (XLRE)
    • Healthcare (XLV) and 
    • Utilities (XLU)

 

Bear Market Plays

 

As I mentioned above, you want to be long the lowest volatility, lowest beta names that offer the best risk/reward.

 

Below is a graph that plots the risk/reward ratio (X axis) against the expected returns (Y axis). In a bear market, you want to be long stocks in the high and left quadrant of the graph. This is back tested research from 42 Macro LLC. sourced from Bloomberg data.  

 

These are mostly the bond ETFs and commodities that historically have done well in environments when both growth and inflation are decelerating. 

 

Bring It Home

 

You can always be in control of your trading – and emotions – if you are consistently ahead of the markets. 

 

Understanding Fed policy and how to get out ahead of the Fed is critical to make money in all trading environments. 

 

Investors are just starting to make the switch into the direction of selling rips as opposed to buying dips. 

 

Meanwhile, I have been talking about this for months …

 

Sell the rips cover on dips

 

Rinse and repeat, and as always …

 

Live and Trade With Passion My Friend

 

Griff