Inflation, the Fed, and More New Lows in the Indexes
Yesterday, after yet another shocking CPI number last Friday, the Federal Reserve made a historic decision to raise interest rates by 75 bps. In the time frame between when the CPI data came out last Friday morning, and when the Federal Reserve announced their June decisions, the indexes careened to new lows on the year as heavy sentiment took hold.
Fed days can always be volatile, and that is especially the case in this market environment. In yesterday’s case, once the highly anticipated Fed decision finally came out, it, combined with the high put/call, sparked a bit of a relief rally. This relief rally was the shot that the indexes had at trading higher. Because of the large amount of shorts in this market, any kind of catalyst could send it sparking higher. Except for the fact that…we did have a catalyst…and it barely caused a blip.
By today, the indexes had gapped lower, yet again. In all reality, the real move, as it relates to the Fed, isn’t the day of – it’s the day afterward. That day was today. Today, the S&P was down over -3%. The Nasdaq was down over -3.5%, and is back at the fall of 2020 levels. The Dow fell below 30,000 and wiped out gains made since January of 2021. The move today demonstrates that a one-day, Fed-related relief rally is not going to save this market.
So, what is a trader or investor to do? I stopped by The Exchange on CNBC with Kelly Evans to discuss.
Putting Money to Work?
I was asked the question I get so frequently, which is, “Is there anything you can buy here?”
Right now, I don’t see anything worth buying, unless it’s an inverse ETF in one of the relative weakness areas of the market, including the Nasdaq, ARKK, the semiconductors, or housing. Market internals remain incredibly weak (we saw a new low on the $tick this morning, as the reading hit -1865, otherwise known as very significant selling), volume keeps flowing lower and all stocks and sectors continue to fall.
Check out our segment below:
With the Nasdaq still leading the declines, @traderDanielle explains why she thinks the tech-heavy index could make a round trip all the way back to February 2020 levels, and has some names that she's shorting or trading in the near-term to weather the sell-off. $SARK$SQQQpic.twitter.com/BKHaMnm973
Normally, you can find me joining Kelly weekly on CNBC!
Let’s talk more about inverse ETFs, and why they are an interesting area of focus right now.
Inverse ETF Focus:
I like inverse ETFs because they allow traders to add long positions to their accounts without having to get involved in shorting stocks or adding more complicated hedging positions.
The primary inverse ETFs I’m eyeing could either be used as a trade, or to protect your long-term portfolio. I’ve been in and out of these this year, depending on price action. Right now, I’m eyeing additional entries, particularly if a short squeeze arises.
SARK – Technical Chart Setup
One inverse ETF I like is the Tuttle Capital Short Innovation ETF (SARK). This is the inverse ETF that does the opposite of how Cathie Wood’s ARK Innovation ETF (ARKK) performs. This innovation ETF is one of the weakest areas of the market currently, and the majority of the top stocks in this space are continuing to careen lower. I’m going to continue shorting ARKK to a $32 price target (it’s currently sitting at $36.98, as of this writing) and on the inverse ETF SARK, I am targeting $80-90. Yes, it’s already up 5.72% today but I still think there is more upside, as it closed at $70.66. Obviously, it would be better to buy in on a down day, such as around $60-65.
SARK ETF – Weekly Chart – Click the image to Enlarge
SQQQ Technical Setup
As the Nasdaq is the weakest of the indexes currently, when trading one of the indexes to the downside, I like to focus on the Nasdaq. Conversely, instead of shorting the QQQs, traders can take on long positions in an inverse Nasdaq ETF, such as the Proshares Trust UltraPro Short QQQ (SQQQ,). I am targeting $70-75.
The Proshares Trust UltraPro Short QQQ ETF has an inverse relationship with the Nasdaq. As you can see, it bottomed in December and has been climbing higher since. Click the image to enlarge.
Short Trades?
Of course, there are short opportunities in this bear market. But, as we are directly on lows, it’s not a great spot to get in. If and when we see some kind of pop higher, I will be happy to add some short positions.
The primary short setups that I’m eyeing are tickers that we can trade pre-earnings because they have tanked on earnings the past few quarters. We are entering the Hot Zone, and now I’m calling it the Danger Zone, because it’s the timeframe pre-earnings in which tickers have pre-earnings momentum moves. Previously, they would be to the upside, but now…tickers instead are falling.
These pre-earnings moves occur because of the hype and sentiment surrounding the companies on earnings. Either investors look upon earnings as a potential, bullish catalyst, and buy into the company’s pre-earnings in anticipation of a great report, or…you guessed it, they bail, trying to escape prior to an overnight crash. Which do you think is more likely this quarter?
I’m sticking with the short side.
Entering the Danger Zone
Netflix (NFLX) is the first one on my list. This one is absolutely a short in my humble opinion. And, it’s entering the DZ tomorrow!
Netflix is entering the Hot Zone on June 17th, 2022. This is the zone pre-earnings in which tickers typically see pre-earnings momentum moves. Click on the image above to enlarge.
I am planning on shorting it, and target $150. Ideally, I can get a bounce to do it on!
How is your trading going? Are you focusing on the short side, are you flat or waiting to trade a short squeeze higher? What about buying stocks at these lows?
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