Stocks are under pressure today…
But this isn’t one of those buy the dip moments…
You see, last night, the Death Line in the S&P 500 was breached… a sign that bears may have taken control for good.
Now, markets consist of both buyers and sellers. When stocks get bid up, we say that the buyers are more aggressive than the sellers.
On the other hand, when stocks are crashing the sellers are more aggressive than the buyers.
Critical levels of support and resistance are made while they battle it out. Support is identified as the level where buyers seem to come back in and keep the stock up.
And resistance is that level where the buyers struggle to break above.
Well… last night… the buyers in the S&P 500 failed to come back…breaking support… and breaching the Death Line.
(Things could ugly real fast, if you haven’t watched how to profit off crashing stocks yet, watch it now)
Now, if you’ve been following me over the last few weeks you know I’ve been having my way with this market. And if you recall, part of my success has been due to:
- Keep a balanced portfolio
- Trade smaller to take into account the volatility shift
- Take profits quicker because the market is news-driven
(I’ve been telling clients that a balanced portfolio works well in a news-driven market, but if we close below the Death Line, you can expect significant changes in my portfolio, if you’re not getting my real-time alerts and live stream of my portfolio, click here to get started)
Now, I’m not just looking at a technical pattern in the S&P 500 here… I’m looking at other macro-indicators…And what they’re telling me isn’t good either.
Investors are gobbling treasuries… and treasury yields are at their lowest level since 2017. And to make matters worse, the 3-Month/10-year yield is inverted.
In other words, the 3-month T-bill is paying a higher interest rate than the 10-year treasury note at the moment. This is the worst the spread has been since 2007… and you don’t need me to tell you what happened there.
That said, I’ll be looking to make some portfolio changes over the coming days. No, these aren’t defensive moves…I’m looking to get offensive here and make a mini-fortune if my thesis sticks.
(You don’t have to be defensive when stocks sell-off, I prefer to turn it up and profit on the downside. That said, my QQQ puts are looking good this morning, click here to get my alerts in real-time)
That said, I’ve got some very important charts I’d like to share with you next. If the S&P 500 closes below the Death Line here’s my plan.
SPY Below the Death Line, Now What?
Well… the SPDR S&P 500 ETF (SPY) is below the Death Line this morning… and the bears seem to be in control for the time being.
Remember this chart from the other day?
Well, I mentioned the “Death Line” in Your Jump on the Week… and a few times before that too.
SPY closed right at that line yesterday… and is currently trading below that red line (the “Death Line”). We’ve been watching the Death Line to get an overall direction of the market…
However, we need to see SPY actually close below this red line to get confirmation of a potential sell-off.
But what does this all mean?
If SPY closes below $280… it could be a start to a market correction.
Now, if we do get a close below $280… the next level to watch is around $277.50 – $278 (SPY is trading slightly above that right now).
If SPY breaks below $278… the next line of defense is around $275 (the 200 simple moving average on the daily chart).
Now, the reason for this weakness?
There are a number of factors, like political issues in Europe, growth concerns, and of course… the U.S – China trade war (there are no clear signs of a resolution on the horizon)…
Right now, traders are getting a bit shaken up… and I don’t blame them if they’re long stocks and haven’t been maintaining a balanced portfolio.
You’re probably wondering, “Well Jeff… what do I do at these levels, do I buy or short?”
I’m not going to start buying stocks until I see a clear signal (my money pattern flashing a buy)… but I’ll be looking for some options on some exchange-traded funds (ETFs).
I’m getting a bit nervous as I’m looking at the charts on three ETFs right now.
ETFs to Watch When Stocks Are Crashing
The iShares 20+ Year Treasury Bond ETF (TLT) is one of my favorite ETFs to trade… A few weeks ago, I was locking in profits in TLT…
(TLT is my bread-and-butter trade… and if you want to get alerted about my moves in TLT options, click here to get started)
(If you want to know the full details of how I trade TLT, click here to get started)
… and I’m looking to trade it again.
Now, TLT tracks bond prices… and it’s been shooting through the roof recently.
So what’s the reasoning behind this move?
Well, the market thinks rates should be headed lower. If you don’t know interest rates and bond prices have an inverse relationship. In other words, when rates fall… bond prices rise.
Right now, we’re seeing Treasury yields plunging to their lowest levels since 2017… and the yield curve has been inverted.
Generally, when the yield curve gets inverted… we see market sell offs due to recession fears.
An inverted yield curve happens when long-term bonds have a lower yield than short-term bonds… and it’s a rare sight. Historically, we’ve seen inverted yield curves before major U.S. recessions, like the one we saw in 2008.
The market is clearly worried about something bigger than a rate cut… like a stock market correction or crash… and bond prices have been bid up as traders are looking for places to park their cash and protect their portfolios.
With the inverted yield curve… and Treasury yield falling… there’s clearly something wrong with the markets. I wouldn’t be surprised if stocks continue lower from here.
Now, another problem I see in the market right now is the consumer staples sector.
Could Weak Consumer Staples Performance Be Telling Us Something?
The Consumer Staples Select Sector SPDR ETF (XLP) also has me nervous about where the market is headed.
Think about it like this… stocks like Coca-Cola (KO), Wal-Mart (WMT), Costco (COST), and PepsiCo (PEP) are thought of as defensive stocks.
One way to get long these stocks is XLP.
Now, people generally buy consumer staples stocks because they are considered “safe”… but look at the performance of XLP once the market got its taste of volatility.
Clearly, investors and traders have been selling XLP over the past week and a half.
That tells us that the market isn’t as strong as the bulls might think… otherwise, XLP would be continuing higher, and we wouldn’t see Treasury yields dropping… and TLT skyrocketing.
I’m also looking at the ETF tracking the transportation index – the iShares Dow Jones Transportation Average ETF (IYT).
Well, similar to XLP… this could be another signal that the market isn’t that strong.
Here’s a look at IYT on the hourly chart.
Think about it this way… IYT pretty much tracks the health of the overall economy.
When companies are healthy and shipping products… the companies included in IYT should do well… and overall GDP remains solid.
However, when IYT sells off… we should be worried about growth… because how can an economy grow if no one is shipping products?
Now, tomorrow, we’ve got some big economic indicators to keep an eye on because they could give us clues as to where the market is headed.
At 8:30 AM ET we’ve got GDP numbers, as well as International Trade in Goods and Jobless Claims. At 10:00 AM ET we’ve got Pending Home Sales.
So we’ll be keeping an eye on these indicators tomorrow.
We’re going to be pretty active at Weekly Money Multiplier, and we’ll be sure to let our clients know about our next moves. If you haven’t been receiving my real-time alerts, watchlists, and market commentary… click here to get started. Now, if you want to learn how to navigate the market when stocks are crashing, watch this webinar.
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