By Jeff Bishop – WeeklyMoneyMultiplier.com
Compromise. It’s what every happy and healthy relationship needs. And stocks look stronger today because of it.
So what’s changed over the last 24 hours?
- Lawmakers have reached a temporary deal to prevent the government from shutting down (it looks like the Wall might end up being a fence when its all said and done).
- U.S. Trade Rep. Robert Lighthizer will be in Beijing on Thursday with the goal of striking a trade deal with the Chinese. Asian markets closed higher in hopes a compromise can be met.
Now, if you don’t know, I study macroeconomics, market volatility, and other big-picture catalysts… because that’s how the smart-money trades. And as you can see, it’s politics pushing stocks higher today.
But you know what’s catching my eye right now?
- VIX (the market’s fear index) is down and might hit a 13 or 14 handle for the first time since October.
- Smart money still isn’t chasing this equity rally.
How do I know?
All you have to do is look at the bond market. Despite a strong rally, bonds aren’t really flinching…
…if it was really “risk-on” wouldn’t you dump bonds and buy stocks? That’s what the smart-money would do…except…they are not doing it now.
Potential Bear Market in the Cards?
It wasn’t too long ago we witnessed U.S. stocks reach bear market territory. If you don’t already know, a bear market is marked by a 20% decline within a set period, typically a little over a month or more.
Now, the markets have since rebounded and have investors euphoric… However, there are some factors that could stuff this move higher.
Despite the stock market having its best January in three decades, the smart money has remained cautious… cutting their long positions and placing bearish bets, thinking the market could crash.
Now, to start February, you would think the smart money would be following the trend, right?
Hedge funds have actually had their lowest net exposure since January 2018. In other words, they have more short positions than long positions and have been on the defensive. It’s quite clear they’re expecting a slew of potential risks on the table…
Risks that Could Cause a Bear Market
- The Eurozone is a mess. There are less than two months to go until Brexit becomes official. However, the U.K. hasn’t approved a final deal with the European Union. We’re going to get some more clues this Thursday when the British parliament holds a debate on Brexit.
- The markets are still ignoring the U.S. – China trade talks and have been too complacent. Even though U.S. trade representative Lighthizer will be in China to try to strike a deal… smart money is expecting the March 1, 2019 deadline to be pushed. They’re thinking the tariffs on $200B in Chinese imports would not be raised to 25% – despite the President of the U.S. (POTUS) threatening to do just that.
- The CBOE Volatility Index (VIX) has been crashing. Generally, when volatility is selling off with a slew of potential negative catalysts on the table… there’s a higher chance the stock market could sell off.
- Some traders think the Federal Open Market Committee (FOMC) could hold the stock market up with its dovish tone. However, you can see all the risks on the table, and I think these all outweigh the Fed’s decision to raise rates.
- Bond exchange-traded funds (ETFs) have been strong. But what’s this tell us? Well, there’s a pink elephant in the room – if the stock market was actually strong, why is the iShares 20+ Year Treasury Bond ETF (TLT) still so strong? You see, when stocks are strong, bonds tend to be weak. However, we’re seeing both markets trending higher, signaling there could be a crash on the way.
Could SPY Reverse Its Trend?
For those who were long into this move, that’s awesome… but how would you position for a head fake?
Well, check out the daily chart in the SPDR S&P 500 ETF (SPY).
If you notice, SPY has actually tried to break out and stay above this area before… However, it’s pulled back and tested or broke below the $260 level. With all these negative catalysts on the table, I don’t think a correction is out of the question.
You might look to buying put options on SPY at these levels if you see a clear indication of a potential reversal. Now, if you don’t know anything about options trading, make sure to get up to speed by reading this guide.
The Disconnect Between TLT and SPY
Now, if you want to go on the defensive, TLT might be another play… again, you need to understand options, macroeconomics, bonds, and technical indicators before you go out slinging TLT options.
Here was my trade in TLT recently.
Just by understanding options, key macroeconomic variables, and the money pattern… I was able to generate these profits:
Now, just like the smart money thinks… it doesn’t make sense to chase stocks or ETFs… so if you really want to hedge your portfolio, wait for pullbacks and patterns to arise.
Here’s what TLT is doing now…
Now, I’m looking for this to reach $123, but I’ve already taken half of my position off the table… so it’s a freeroll for me.
What am I looking at this week?
- Consumer Price Index at 8:30 AM ET and Treasury Budget at 2:00 PM ET on Wednesday.
- U.S. Trade Rep. Lighthizer and Treasury Secretary Steven Mnuchin are scheduled to hold trade talks Thursday and Friday.
- Brexit debate on Thursday.
- Jobless claims, PPI-FD, Retail Sales at 8:30 AM ET; Business Inventories at 10:00 AM ET, Fed Balance Sheet at 4:30 PM ET.
- Industrial Production at 9:15 AM ET and Consumer Sentiment at 10:00 AM ET on Friday.
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