Time to Check the Warning Signs

It was great seeing many of you on the Griff’s Picks show yesterday. It was a crazy day and good to run through some trades …


Remember, the point of Griff’s Picks — which is another bonus available to Volatility Edge and OP Pro Subscribers — is to run through my analysis of what is currently driving market flows …


Then I break down the sector of the market most impacted by those flows …


And finally analyze the specific stock and give you what I believe is the lowest risk for the highest return option to play.


Now, there is one very big issue that demands our attention over the next weeks and with so much uncertainty hanging over the market, the fear factor may dominate trading … 


Today, I’ll lay out the issue plus a trade for now and another to tee up for when you see the warning signs …


The Potential Fiscal Cliff that Leads to Recession 


The political battle being fought in Washington is coming at a really bad time. Congress has gone from spending $3 trillion in 2020 and another $3 trillion in 2021 to … to no agreement for 2022 yet.


This is eerily similar to what happened in 2011. Notice the chart below that highlights the Federal deficit as a percentage of gross domestic product (GDP) …



The more negative the number, the greater the amount of spending, relative to GDP, the federal government undertook in a given year.


Notice the decrease in spending every year after the great recession of 2008, which caused a 20% drop in the stock market in 2011, followed by recession in 20012 and into 2013 …


The Fed, as always, was late to respond and had to catch up by launching QE and keeping it in place for two years.


Now, fast forward to today and it’s happening again. The Fed is trapped because it over did the stimulus after Covid hit and let inflation rise above their 2% target …


Our central bank created a serious stagflation environment of high inflation and a weakening economy. It will have to now taper the bond purchases just as Congress can’t agree on additional stimulus …


S&P earnings forecasts are sky high, just as growth forecasts are plummeting. It’s not a good scenario for stocks, especially not low-rated stocks…


iShares Corporate Bond ETF (Ticker: HYG)


During the webinar yesterday, a pro Option Pit subscriber brought up HYG


So, I did a bit of digging into the fundamentals and technicals of the ETF and here is what I found …


The underlying assets in HYG are low-rated corporate bonds, which have been scooped up the past couple of years as investors sought out higher returns in fixed income.


However, with inflation running at 5%, the 4.5% yield on HYG does not even cover the investors annual cost of living increase.


Plus, corporations are issuing record amounts of debt to lock in low rates ahead of record Treasury issuance that will hit the market once the debt ceiling is passed, so the timing of the bear strategy is good … 

 

Next I reviewed the technical patterns and found two bearish indicators …



Notice the new all-time-high price while RSI diverged from price and did not make a new high. This is a reliable reversal pattern … 


Plus, the daily candle (last candle, upper right)  is known as a hanging man pattern, which also signals a reversal in trend … 


My Trade


BTO $HYG Oct-22 88/87.5 Put Spread for $.23 


In this trade I am willing to receive a lower reward for my risk because the reversal patterns increase my probability for success and the volatility of HYG is so low … 


Here is the risk profile …



Have a question about this? Drop a comment below!


Bring It Home


You have to take what the market gives you …


This is a shorter term trade and it fits my macro theme of higher inflation for longer and higher bond yields over time 


Live and Trade With Passion My Friends,

Griff

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