To The Moon

ETF Edge #15

Originally posted on thepensivenugget.com

Markets seem to have returned to their pre-war trends (most of them, at least).

While it remains uncertain how long this will last, given that the war in Ukraine is still ongoing, the continuation of previous trends creates trading opportunities.

Markets Seem To Be Returning To Their Pre-War Trend

• Most ETFs that were selling off before Russia’s invasion have reverted to selling off, and vice versa
• SPY, QQQ, XLY have tumbled over the past week, but have yet to retest their post invasion lows
• IWM’s underperformance looks to have been prescient (at this point) in signaling the lack of conviction in the rally over the last 2 weeks, although it remains stuck in its range
• XLU continues to make new all time highs; XLI, XLF are starting to look bearish  
• Fixed Income ETFs have started to sell off again
• Corporate bonds, LQD and HYG, are looking increasingly likely to to test 2020’s COVID lows 
• EMB is testing major support, a break of which could also see it fall to its COVID lows
• TLT is making new lows for the year, as US long yields make new highs for 2022

• Energy stocks (XLE) remain high, but have so far failed to decisively break above their quadruple top. Energy stocks aren’t reflecting the weakness and volatility in oil prices… how long will this disconnect last?

• Wildcards:
• Consumer staples stocks (XLP) have reverted to outperforming their consumer discretionary counterparts (XLY), which hints at serious economic problems compounded by high inflation 
• The US yield curve remains flat and inverted in some places even as the Fed amps up its hawkish rhetoric

Trading Ideas - Performance

Trading Ideas - Commentary

• Re-established shorts in LQD and HYG on breakouts of their previous lows
• Looking to do the same with EMB

• Volatility in the markets has led us to exit/stopped us out of:
• IWM stopped out for a gain of 1.43%
• XLY stopped out for a gain of 9.26%
• XLI stopped out for a loss of -3.45%
• XLF stopped out for a loss of -6.27%
• XLP stopped out for a loss of -3.14%
• Exited TLT for a gain of 1.72%, as the market focused on the “safe haven” bids narrative at the start of the Russian invasion at the end of Feb
• Exited XLE for a gain of 16.64% after oil’s sharp move higher and immediate reversal on 8 March
• Exited LQD for a gain of 5.56%, HYG for a gain of 4.16%, and EMB for a gain of 6.29%

Trading Ideas - Long

• XLU provides a nice, strong bullish trend to follow that is also a play on the shortage and uncertainty surrounding global energy markets  
• Oil prices remain volatile and difficult to trade without getting stopped out
• XLE, while (curiously) detached from oil’s volatility, is stuck in consolidation

• XLP again provides us with an interesting bet
• Defensiveness against selloffs in major indices and general market volatility
• Upside potential from its bullish trend
• As before, can pair an XLP long with a short in XLY, especially if IWM breaks out to the downside (be mindful of the beta mismatch and the ways in which it can work for and against you)

Trading Ideas - Short

• IWM is still trading sideways, with a downside break looking more and more possible
• Wait for the market to signal which direction it wants to move in as IWM has yet to make a decisive breakout of its range between $191-$208.5

• LQD, HYG, EMB
• LQD, HYG, and EMB again look poised for a large move lower, possibly all the way to COVID 2020’s lows

• EEM recently broke below its well established bearish channel, and is looking very weak even with its bounce

• EZU and FXI are also good short candidates, as their charts still look bearish
• FXI is trickier to trade now as the Chinese government has verbally intervened once to halt the selloff in Chinese stocks   

• XLI and XLF are starting to look weak, although further downside breakouts are needed for confirmation

US major indices fail to breakout to the upside… SPY

• SPY failed to make a decisive move above major resistance at $457 and has fallen lower over the past week
• $410 and $457 are the key levels to watch for breakouts to the downside/upside respectively

US major indices fail to breakout to the upside… QQQ

• US tech stocks also failed to make a decisive move above major resistance, at $367, and has tumbled to hit support at $340
• A break below can open the door to a retest of QQQ’s Russian invasion low ~$316

And small caps remain in their range… IWM

• US small caps fell with the major indices, but remain within their $191-$208.5 range
• IWM has almost fallen back into its bearish channel, but a decisive break below $191 is needed to confirm the continuation of its downtrend

Financials hover near support… XLF

• XLF tested support at $37.2 but did not manage to breakout in a decisive manner
• But, it hasn’t yet rallied in a meaningful way above $37.2, and another test of the support level seems likely

Energy stocks are consolidating at their quadruple top… XLE

• XLE is still trading sideways close to its quadruple top ~$78.5, even as WTI fell below $100 again
• Curiously, weakness and volatility in oil prices have yet to be directly mirrored in energy stocks

Industrials tumble after their reversal… XLI

• XLI’s sharp reversal below $102.7 at the end of March did indeed signal the end of its bounce, at least for now, as Industrials tumbled to close in on $97.8 support
• Sideways trading between $97.8-$102.7 is still likely

Utilities remain at all time highs… XLU

• XLU continues to rally and make new all time highs
• Normally, utilities don’t do well in rising rate environments, but Russia’s war has upended energy/power markets

Consumer staples make new 2022 highs… XLP

• XLP has decisively broken out of $76.9 resistance, and is now trading above its Jan highs ~$78
• Consumer staples stocks have reverted to outperforming consumer discretionary ones again

As Consumer discretionary tumbles… XLY

• XLY has tumbled along with the major indices, breaking below $178.5 support yesterday
• If this breakout is sustained, a test of its Russian invasion low at $161.3 is possible

Real estate stocks continue to trade sideways… XLRE

• XLRE hasn’t really taken off after breaking out of its range last week, but it hasn’t fallen back down either
• It continues to consolidate above previous resistance at $48.8
• A retest of highs at $52 is still possible

European equities are still looking weak… EZU

• EZU also fell over the past week
• A further selloff to its March lows ~$37, if not support at $35.6 is looking likelier by the day

EM stocks turn down again… EEM

• EEM fell along with US and European stocks, and its mid March rally looks to be over
• A fall back to retest its lows ~$40.7 is possible

As do Chinese large caps… FXI

• FXI’s break above $33.8 turned out to be extremely short lived, as it has now almost fallen back into its bearish channel
• Will the Chinese government verbally intervene again?

Investment grade corporate debt sells off sharply… LQD

• LQD has sold off sharply, below $120.7 support as UST yields rallied (lower prices)
• A fall to test major support at $105 (2020’s COVID low) is on the cards now

High yield corporates too… HYG

• HYG has also sold off sharply below major support ~$80.5 as UST yields rallied
• Critical resistance lies ~$78.35, a break of which would open up the possibility of a fall to retest its COVID lows at $67.5

EM sovereign bonds fall to major support… EMB

• EMB also fell, and is now testing major support at $93.8
• A decisive break below will reopen the door to a test of 2020’s COVID low ~$85

And USTs plumb new lows in 2022… TLT

• TLT’s consolidation has ended with a decisive break below $127.5 support, as US 10y yields hit 2.8%
• Major support lies ~$118, and ~$111, levels which date back to 2019 and 2018 respectively