The Reflection in the Mirror: (The Seven Day Scope-Snipers Only)
“Every great money manager I've ever met, all they want to talk about is their mistakes. There's a great humility there.” Stanley Druckenmiller
The market is terrifying!
Or is it?
Portfolios have been choppy but are holding up well—up 17% in the boring portfolio and 36% in our futures swing trading portfolio. As I mentioned before, summers are filled with chop. If you've been here for a while, you know what I’m going to say next: Chop leads to pop!
The summer months bring choppy, annoying, and often depressing trends. Don’t let it get to you. Stick to the survival strategies we laid out at the start of summer. Today, I’d like to explain when and why I’d turn bearish
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Regime/Environment
We are starting to see some sectors breaking down.
Others are leading the way. This is not the right environment for a full-on bear market. Instead, it’s a time to stay open-minded and consider buying boring assets like bonds, utilities, and other defensive sectors. REITs and utilities benefit from lower interest rates, as they can borrow more cheaply to finance operations and expansions, boosting profitability and making their dividend payments more attractive to investors.
Banks can borrow at lower rates on short-duration liabilities and lend at higher rates on long-duration assets. All three of these sectors are showing relative strength in this environment, and we’re always on the lookout for opportunities in the strongest sectors. We like XLF above 42.50, XLU as long as it holds above 75, and XLRE above 42. These are prime areas for finding new trades in the current environment. Highlight specific sectors or markets showing significant activity.
Here’s a link to help you find relative strength stocks within each sector. Type in any stock, and it will show what sector it’s in and its relative strength compared to SPY, the sector itself, and the broad market.
Breadth
I always return to breadth when trying to understand what the broader market is doing—especially when things seem unexplainable, lol. When I look at breadth, I continue to see a strong market. I know I sound crazy most days when I say this, but bear with me for a second. Let’s review some risk-on indicators alongside our breadth data. The new highs-new lows list is still pointing to a strong market.
The NYAD line continues to show major relative strength.
% of stocks above the 200 day and 50 day MAs are holding up as well.
Junk bonds are a risk on indicator
Junk bonds continue to make new highs.
There is some risk out there.
What is Gold saying?
Gold is signaling that there’s still some risk out there, but it’s not a liquidity risk. We shouldn’t expect any nasty deflationary shock in the near future. I’m open to the possibility because anything can happen, but I don’t see it in the charts yet. What does this look like? Summer! The transition from summer into September is always rough.
Every year, we explain how September’s seasonality tends to have a bearish tilt and a more defensive posture. We’re seeing that now. Will it last? I don’t think so, but it could be a long month!
While everyone is staring at the broad market, we have to look at where opportunities are and they could lead the market all the way in to the end of the year.
As we said the defensives are hot!
At the moment the market is trading defensively. The copper to gold ratio is screaming that rates are still headed lower. The sectors we talked about today look great but I would be cautious here.
There is chop ahead but in to year end that chop is going to lead to a major pop that we are going to take advantage of!
After a choppy week in the markets, I encourage everyone to understand the cycles of the equity, commodity, bond and currency markets.
It is an election year. We are still in the summer doldrums and we are seeing normal volatility. Stay tuned for changes.
Here we went over what I would need to see to get bearish.
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REITs does sound interesting. There was a considerable amount of innovation in commercial and residential real estate leading up to C19. I wonder if city zoning laws will get in the way.