Time to Change Lanes

Hey There Income Hunters,

July is the month you need to change lanes — and there’s still time.

I knew the iShares 20+ Treasury Bond ETF (Ticker: TLT) was telling us something and it crystallized this week …

Take a look at this rally over the past couple of months:

Sixteen dollars in two months — which equates to .60% in interest rate equivalents!

It was tough to jump in because, at the same time, accelerating inflation was all investors could think about….

But here’s the thing, the market has swerved into another lane …

We are officially in a stagflation economic environment.

Now you must adjust.

Stagflation

The stagflation environment will be a tough one for traders to figure out.

Growth slows as inflation accelerates — sounds easy enough, but the hard part is understanding what sector allocation changes need to be made.

We just came from a quarter during which growth and inflation accelerated

It doesn’t get any easier, just stay long commodities, financials, energy, tech and industrials, and Sell bonds and the dollar.

It worked like a charm! (See my trading record.)

However, with slowing growth and accelerating inflation you want to be:

Long: Treasury bonds, gold, commodities, utilities, tech, energy and industrials…. 

Short: Financials, REITs, materials and telecom

Financials were the other sector (along with bonds) that turned bearish over the past month after being a great performer in Q2.

So let’s take a look …

SPDR Select Sector Fund (Ticker: XLF)

XLF peaked at $38.50 and then the day the Fed hinted at tightening earlier than expected, it started melting down.

Once it broke the 50-day moving average on high volume, it spiked lower before it came back and tested the 50 DMA — and failed again:

That is a sure sign of changing trends.

Sellers are now in control and the slow growth, accelerating inflation environment is not good for banks because they own so many financial assets that get slammed during long periods of inflation.

Plus … in a slow growth environment, bank customers suffer, which can lead to loan defaults.

1X2 Put Spread

I mentioned this idea to Andrew Giovanni who has an ideal option trade for all occasions and he suggested the 1X2 put spread

I analyzed a XLF 36/34.5 1X2 put spread to Aug. 27 at around even. Here is the risk profile:

The 1×2 put spread is an ideal trade for XLF, which chops around and doesn’t usually trend in one direction.

Bring It Home

Making the adjustment in trading is critical… 

Whenever you can take out one side of the market — just look to sell XLF on rallies or just looking to buy Gold on dips — you can trade much more efficiently.

Much more to come on stagflation and strategies that will crush it.

Until then…

Live and Trade With Passion My friends,

Griff


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