Time to Fade J-Pow & the Fed

Hey There Income Hunters,

This week could get off to another rocky start ahead of the consumer price index (CPI) report arriving on Friday.

The report comes just five days before the Federal Open Market Committee (FOMC) meeting next week to discuss inflation risks and speeding up quantitative easing. 

We may see a headline CPI number close to 7%, which would be the highest rate since 1982. 

I actually think the worst of the inflation picture is priced in. I’m looking for a low in equity markets to be established this week for the rest of the year. 

Today, I’ll share the data I see that makes me think last week’s lows will hold, plus the sectors to favor for a nice bounce into the year’s end.

S&P 500 Rally

The S&P rallied into the close on Friday after making a new low on the day, but overall it was a bad week for stocks. 

This was the highest volume week for the S&P since January, with the market over 5% from the high. Now, this time a year is tricky, especially with the market still up 21% for the year.

After a year like 2021, when the market was up strong and you have the potential for higher taxes next year, we could be getting a lot of tax-loss selling to offset the gains. 

We have also seen a ton of put buying with a high implied volatility premium being paid over actual volatility.

The vol premium and the fact that SPX was able to close above the 50-day moving average may be signalling a lack of strength to this downturn. 

A key will be to see if real selling comes into the market early in the week. If the market takes out last week’s low on good volume, we could be in for more downside.

I expect to see a bounce in stocks and a lift in bond rates into the $110 billion bond supply the US Treasury is issuing before Friday’s CPI report. 

Oil Is Crucial

The fact remains, oil plays a major part in the global economy … so if there is a further meltdown in oil the rest of the market will follow.

However, the producers and services of Oil have traded much better than the product itself and that tells me we are close to the near-term low for oil.

Take a look at the SPDR Select sector Fund (Ticker: XLE). Money was flowing into XLE, which holds the top producers and servicers … 

This is a good sign for the sector because even at $60, oil these companies are accumulating cash, which is a great thing for shareholders.

I think we could see a nice bounce into the year’s end in oil and, I especially like Viper Energy Partners (Ticker: VNOM), which is a royalty company. 

Royalties have diversified investments in many producers and provide a low risk/high reward play on the sector as a whole.

For a broader play on a bounce, look at the iShares Russell 200 ETF (Ticker: IWM) …

The Russell is down 13% from the high and the positive rsi/price divergence that was confirmed on Friday offers great prospects for a recovery. 

Bring It Home

The correction was flagged by to internal signposts I highlighted over the past couple of weeks. 

The Omicron variant added a bit of fear and more lies from Jay Powell poured gasoline on the fire. 

I think those headlines are priced in and now we will bounce for a couple of weeks. 

It is so critical to get out in front of the markets and avoid the crowded trade. Once the consensus narrative is priced in, it is time to move on to the next low risk/high reward opportunity. 

Live and Trade With Passion My Friends,


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