Friday's worst-in-months selloff extends… Underneath the fear, it's all about rates… A strange and worrying divergence… Seasonal patterns show choppy months ahead… How you can still profit as stocks tread water…
By Michael Salvatore, Editor, TradeSmith Daily
You don't need me to tell you stocks sold off Monday. We all felt it.
After a relatively strong open, where it looked like the market was shrugging off the Friday panic and weekend events, traders threw the gear into reverse and floored it.
Each hour you held the S&P 500 ETF (SPY) on Monday, you lost money. That was enough to take the hourly chart to the most oversold reading since February.
Another key metric to confirm this downtrend is the market's breadth – or the number of stocks showing bullish price action.
From the highs last month, the number of S&P 500 stocks above their long-term moving average is also near the February lows:
And per a conversation I just had with my colleague and contributing editor Lucas Downey, he found that no U.S. stocks made new 52-week highs yesterday.
We may be entering a proper correction in stocks, which we warned about a month ago. And there's plenty of evidence to suggest this choppy price action will stick around for a while longer…
Of course, that doesn't mean you have to sit idly by and accept whatever Mr. Market throws your way. You can profit in this environment. Even if you like to keep it simple and just buy and hold stocks.
I'll share my research on this idea later this week, and tell you how to access it in just a bit.
But let's first step outside stocks, zoom out, and see some of the larger forces at play...
❖ Beneath every panic-driven headline about conflict in the Middle East…
Lies the true fear at the heart of stock market investors: higher-for-longer interest rates.
We've covered the topic ad nauseum this year, but it bears reinforcement. Despite optimistic expectations at the start of the year, and even the Federal Reserve's own projections, the likelihood of even 75 basis points in rate cuts for 2024 shrinks by the day.
Last week's Consumer Price Index report was the first nail in that coffin. The Fed's entire goal of interest rate hikes was getting the rate of inflation under control, and ideally back to 2%. Reflationary data, with the CPI at 3.5%, shows the hardest days of the battle are still ahead.
And per the CME's FedWatch tool, more than 75% of traders now expect rates to hold at the June meeting – when just a month ago only 41% of fed funds traders held that view:
As of now, the September meeting is the first instance where the odds of a rate cut are higher than a hold.
Bond traders are some of the smartest money in the market. As we've been sharing, the steady rise in long-term bond yields was a strong clue that we wouldn't see rate cuts anytime soon.
(Over at The Freeport Society, market analysis and income expert Charles Sizemore has been calling this for months. Check out his research here.)
❖ And now, there's something even more peculiar happening.
The relationship between 10-year bond yields and the price of gold has diverged for the first time in almost 20 years.
Here's the chart:
On the left scale, in orange, is the gold price per ounce. On the right scale, in blue, is the 10-year real (inflation-adjusted) interest rate, but inverted. Since bond yields move opposite bond prices, this effectively shows us the change in inflation-adjusted bond prices over time.
10-year real yields and gold prices have themselves traditionally held an inverse relationship. As inflation-adjusted yields fall and bond prices rise, the returns in inflation hedges like gold tend to rise, too.
By inverting the 10-year real yield, we can more clearly see how that relationship has changed over the past few years. Now, real yields are rising (inflation-adjusted bond prices are falling) and gold is rising.
What this suggests is that gold traders are bidding up gold in anticipation of much higher inflation, even as long-term Treasury yields rise.
It's an act of defiance – traders don't buy the relatively low inflation numbers we've seen lately. They see a second wave of inflation hitting, and soon.
Best way to take advantage of all this?
If you don't already, have a little gold exposure. Be it physical bullion, exposure to quality gold mining stocks, or "paper gold" ETFs, this trend is years in the making.
And to echo an idea from back in December, I urge you to get more comfortable with trading...
❖ The Trade Cycles Seasonality indicator shows a flat market for the next few months…
Looking over the last 75 years of S&P 500 index data, the average return from now through the end of June is a whopping 0.48% – basically flat, and with plenty of chop in between.
And looking at just election years, there's an even less productive historical trend at work over the next month and change. From today through May 24, the Trade Cycles Seasonality indicator shows just a 0.03% average return.
Will you be satisfied sitting around and waiting through five weeks of maddening price action, especially as hotter inflation continues to eat away at your purchasing power?
Why stand for it? Especially when there's so much opportunity to be found in the quick zigs and zags between here and then. In times like today, where chaos rocks the markets up and down at a whim, you have to be prepared to protect your wealth with quick-hit moves.
I happen to know of two exceptionally qualified individuals who can help you do this.
Jonathan Rose – founder of Masters in Trading and Chicago Board Options Exchange pit-trading veteran.
Jonathan has been sharing free daily trading livestreams at 11 a.m. Eastern. Each day, Jonathan shows a new short-term trading opportunity and walks you through his thesis for the trade. Thus far, he's handed out multiple double- and triple-digit gains for free from these ideas. Sign up to start tuning in here.
William McCanless – short-term trader, technical analysis expert, and editor of Trade Cycles.
William's been hard at work lately at what he calls "The Perfect Trade."
It combines three elements, unique to William's approach, that work together to confirm the likelihood of a trade working out from multiple angles.
One of them is the Seasonality indicator I just showed you, a simple but powerful tool that sifts through market data to show you how assets move during certain times of the year, on average.
Trade Cycles members can use that tool to see the historical patterns of any asset in our database that's seen enough trading data.
Another measure using historical data are the Peak and Valley zones – which shows when assets move through short-term cycles of bullishness and bearishness.
As for the third element… that's something our CEO, Keith Kaplan, will reveal for the first time in an urgent webinar tomorrow night at 8 p.m. Eastern.
We may be in for a rough patch in the stock market, but I urge you to keep in mind the quarter we just put behind us…
The S&P 500 rose more than 10% in the first three months of 2024. That's the kind of return we would normally expect over an entire year… and we saw it before spring truly sprung.
A correction is needed for this market to catch its breath. And if you're worried about the long term, take another look at the election-year seasonality in the back half of the year:
Barring another projected downturn from September through November during election years, the back half of the year is decidedly bullish.
Anything can happen, but what we're seeing today could well be setting the stage for another above-trend rally.
Remember – trying times are buying times. As you trade the short term with the help of our experts, be on the hunt for high-quality stocks to add to your portfolio in anticipation of the second half of 2024.
As always, stay tuned to TradeSmith Daily. We have a special treat coming to you tomorrow morning – a brand-new video with Lucas Downey and me, sharing our findings about major geopolitical events, "Sell in May" trends, and a contrarian take on stocks to buy during a seasonally weak period.
To your health and wealth,
Michael Salvatore Editor, TradeSmith Daily
P.S. In addition, be sure to check in with TradeSmith Daily after tomorrow's market close.
TradeSmith CEO Keith Kaplan will be sending along a special dispatch where he uses the Trade Cycles algorithm to take advantage of a brand-new idea for you.
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TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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