Fixed Income In Focus. ETF Trades You Must Know

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ETF Edge #6

Originally posted on thepensivenugget.com

Fixed income takes a tumble, with no major shifts in other ETFs. This means that energy, financials, and consumer discretionary are still decent trades.

If you would prefer to read this article in a slideshow format, you can do so here.

Fixed Income Takes A Dive!

  • Fixed income ETFs sold off as UST yields rose last week, and look vulnerable to further sell offs
    - No major shifts in US equity ETFs as current trends continue
  • Sector ETFs are also mostly rallying together, although to different degrees
    - Financials (XLF), Energy (XLE), and Consumer Staples (XLP) remain very bullish
    - Consumer Discretionary (XLY) and Real Estate (XLRE) not so much, although they remain in broader uptrends
    - Corporate bonds, LQD and HYG, are poised for a large move lower
    - Emerging Markets equities (EEM) and sovereign bonds (EMB) continue to look very bearish
  • Wildcards:
    - Consumer staples stocks (XLP) continue to outperform consumer discretionary ones (XLY) even as the Fed grows increasingly hawkish
    - The USD remains strong, and the US yield curve has gotten even flatter!

Trading Ideas — Performance

Trading Ideas

Long:

  • XLE to take advantage of how bullish oil prices are
  • XLF if you buy into the narrative that rate hikes are good for bank stocks
    - If you don’t, most traders do, and would be looking to position themselves accordingly
    - Regardless, XLF is trading in a very bullish manner
  • XLI is starting to look like a decent bet
    - Is currently more defensive than XLU, especially with traders following the “higher rates = utilities less attractive” narrative
    - Retains upside potential from stronger economic growth
  • XLP is an interesting bet which could offer the best of both worlds
    - Defensiveness against current sell off and market volatility
    - Upside potential from very bullish trend.

Short:

  • LQD, HYG, EMB, TLT
    - LQD and HYG look poised for a large move lower, possibly all the way to COVID 2020’s lows
    - EMB also looks very weak technically
    - TLT looks increasingly likely to test its Mar ’21 lows at $133
  • IWM has broken below its range, and is now in a clear downtrend
    - This could be a good short if you do not think a bottom is in for equities, or if you simply want to follow the trend
    - Buying IWM puts is another way to express this view which would also allow you to take advantage of a possible spike in volatility
  • XLY is struggling, and now that IWM has broken out to the downside, it’s hard to imagine XLY doing well
    - Could hedge a XLY short with a XLP long to create a pair trade that still makes money if XLY falls, and loses less if XLY changes direction
  • EEM is trading in a well established bearish channel

US major indices consolidate… SPY

  • The SPY is consolidating at resistance ~$451 after briefly breaking above it last week. Major support lies ~$427, and major resistance is at all time highs ~$479

US major indices consolidate…… QQQ

  • US tech stocks are also consolidating after pulling back from last week’s rally. QQQ is hovering just above the level of its end of Jan break out, ~$353

US major indices consolidate… IWM

  • US small caps have also come off a little, and are holding above major support ~$191. For IWM to be considered bullish again, it will have to break out of $208.5 support and the top end of its bearish channel

Financials look intent on testing record highs again… XLF

  • XLF is still in rally mode, and looks intent on remaining that way, regardless of what the major indices are doing. Next meaningful resistance is at its previous (record) high, ~$41.6

Can Energy stocks test their quadruple top?… XLE

  • XLE is still the most bullish chart of the lot, as WTI trades above $90 a barrel. XLE is currently hovering near 2019’s highs ~$68.8, and could push higher to test major resistance ~$78.5, which is a quadruple top

Industrials remain range bound… XLI

  • XLI has mirrored price action in the major indices and pulled back after its rally, and remains in its broader range between $97.8 — $107.6

Utilities are trying to muster up a big rally … XLU

  • XLU failed to test resistance ~$70 before falling lower with the broader market, although its overall trend remains bullish and a test of $70 is still on the cards

Consumer staples remain strong… XLP

  • XLP failed to sustain a break above $76.9, and has fallen back slightly. While XLP remains in a very bullish position, a possible short term range could form between $74 — $76.9

As Consumer discretionary keeps trying to rally… XLY

  • XLY pulled back with the broader market, but looks poised to make a push towards resistance at $189.5

Real estate stocks remain range bound… XLRE

  • XLRE also traded in line with the major indices and cooled off a little after last week’s rally. Real estate stocks remain range bound between $44.4 — $48.8

European equities still look weak… EZU

  • EZU has fallen back to the bottom of its range, after breaking back into it last week. Resistance lies ~$50 should it stage a rally to test the top of its range ~$51.6; support lies in the mid $45 region

And EM stocks remain bearish… EEM

  • EEM remains in a well-established downtrend, but isn’t selling off (or rallying) in a major way

Chinese large caps as well… FXI

  • FXI has begun consolidating between $35.6 — $39.1. Should it break out to the upside, resistance can be found in the $42 region, with major support below ~$33

Investment grade corporate debt is set for a big fall… LQD

  • LQD has failed to hold onto support at $127.9, and is now consolidating ~$125.6. Next support lies a fair distance away ~$120.7, with major support coming in at COVID 2020’s low ~$105

High yield corporates too… HYG

  • HYG has fallen to test support at $83.33. Next major support lies at $78.35, followed by 2020’s low in the mid $65 region

EM sovereign bonds are still weak… EMB

  • EMB continues to look very weak, falling below its bearish channel again. A test of support at ~$103.6 looks likely soon, with no major support after that until $97.5

As USTs continue to sell off… TLT

  • TLT has broken below its Jan lows (higher yields) and looks to be headed for a test of its Mar’21 bottom at $133, as US 10y yields approach 2%