The Market Lived Up to Hype

Hey There Income Hunters,

Well, as I’m fond of saying …

It’s all about those interest rates.

I mean, look at this 10-year yield chart…

On Friday, the market overacted to the headline 266,000 jobs number and 10-year yields went below 1.48%.

That was an insane reaction, especially when wage level was the more important number … 

When the hourly wages component flashed .7% instead of the forecasted -.1%, the 10-year rates did an about-face and shot up to 1.6% …

Now traders need to set up for the $126 billion in bond supply this week.

I nailed this rate move and just need iShares 20 Plus Year Treasury Bond ETF (Ticker: TLT) to settle below 137 to clean up on my put spreads …

It’s just a bit tricky with the consumer price index (CPI) number coming Wednesday, although I am confident that the number will be a bad one for the market.

So, with all the supply, are we going to 1.65%, 1.70% or even back to 1.75%?

And what will those moves do to tech for the rest of the week?

The Setup

I came into this week long gold and silver miners, which are inversely correlated to interest rates. So, I just took a stand and stayed with my core position and bought put spreads on the iShares 20 Plus Year Treasury Bond ETF (Ticker: TLT).

On Monday morning, with gold up .75%, I bought SPDR Gold Trust (Ticker: GLD) put spreads on the open. Those moves helped me squeeze up 2% on the day.

Elsewhere, the tech sector was the worst performer on Monday because of the shift back to higher rates …

That’s because higher rates put considerable pressure on high-valuation stocks that are heavily reliant on future growth. Those companies are captive to financing their business at higher rates while they wait to become profitable. (Plus, when investors have a safe, interest-bearing alternative, some move out of tech into bonds.)

I did, however, find two tech stocks I like and will buy this week … 

Taiwan Semiconductor Manufacturing (Ticker: TSM)

These guys are the best in the business of semiconductors. They are crushing it while everyone else scrambles to cope with all the shortages.

As Option Pit DC and Wall Street Insider Frank Gregory recently pointed out, TSM is running at 100% capacity and announced that it will invest $100 billion over the next three years to expand operations.

You want great numbers? Try a return on invested capital and a return on equity of 20% for the past decade.

Also, Apple (Ticker: AAPL) has been TSM’s largest customer for the past five, so they got that goin’ for them, which is nice.

Now is a great opportunity to get the stock on a drawdown. Here’s the technical setup …

TSM is becoming oversold and I see good support between 105-108. I like that the 200-day moving average is upward sloping so the longer-term trend is still bullish.

I am going to buy longer-term spreads on TSM. They are as solid and talented a company you will find.

Lyft (Ticker: LYFT)

Lyft isn’t at the same level as TSM in terms of talent — but it is trading at a 20% discount for fair value AND is coming off a better-than-expected Q1.

This will be the company’s first profitable year and 2022 earnings are forecasted to be 130% higher. 

They also have 10% short interest, which has been a positive for companies this year. Let’s check the technical setup …

Lyft is more oversold than TSM, so I’d like to see a possible positive relative strength index (RSI)/price divergence. Otherwise $45 is a good target to buy with a $60 target on the upside.

How High Can Rates Go?

OK, so how high can rates go this week? Well, I was looking at last month’s 10-year auction, which went pretty well, and the average yield was 1.68% …

I don’t see this week’s auction coming below that.

That would imply an 8-10 basis point (.01%) rise in rates going into Wednesday afternoon. We also have the CPI report on Wednesday morning at 8:30, so the market will have plenty of time to prepare.

If CPI comes in below 3%, I think the auction will come in around the 1.68 area. If CPI comes in above 3%, say 3.10% or higher, then I think the yield will be above 1.7% — and closer to the yield high around 1.74% …

TLT, meanwhile, would come in close to the lows. Right now TLT is bearish in every timeframe. See the chart below …

I think the next couple of months will be challenging for long-term bonds. June will be another high inflation number and the economic numbers will be strong.

The only thing that could help bonds is if the dollar has another rally — and I don’t see that coming.

Bring It Home,

Post-Wednesday, I think trading will get back to normal, with a return to lower volatility and higher equity prices. The national debt has just gotten so big that you have to prepare to trade during auction weeks.

Think about this, when President Clinton was in office, the U.S. actually had a trade surplus — so the trade deficit was disappearing. Traders were actually talking about what they would do when the bond market closed down … 

Now it’s all about what we’ll do when the debt blows up. 

Good luck today, and as always …

Live and Trade With Passion My Friends,


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