April 7, 2022

Market Gets Spooked by Its Shadow

The Fed spooked markets earlier this week by saying what everyone has been thinking for weeks, if not months already.  We need to combat inflation and inflation isn’t as transitory as they first thought.

The plan of course is to raise interest rates throughout the year and reduce their balance sheet “at a rapid pace” as soon as the May FOMC meeting.  That triggered losses across the major indexes on Tuesday.

That first rate hike is already in the books and as we shared with you yesterday, we fully expect the Fed to hike rates by a further .5% in May. 

An Unusual Theory

Typically, Consumer Discretionary and Growth sectors have an inverse relationship with interest rates; higher rates usually mean people tighten up their purchases and resort to buying only the essentials.  Now, look at what this sector has done over the last month though…


The sector rose 8.45%, so it would seem as though consumers of places like Hilton, Ulta Beauty, Expedia, Chipotle Mexican Grill, Amazon, and others were willing to shake off a war, inflation, and the threat of rising interest rates.

Why? Our theory is a new trend: Pandemic Exhaustion.

People (consumers) are “done with” Covid. (we certainly are). Their lives have been disrupted for two years – meaning, loss of vacations or travel, family dinners and get togethers, shopping, meeting up for happy hour at the bar, you name it.

In other words, our sense is people will continue to spend throughout this summer in an attempt to get one last shot at normalcy, and THEN tighten up on spending in the fall.

Consumer spending in the months ahead will bear this out or disprove it entirely. We’re betting on the former, not the latter.  

TRADE IDEA

Taking a deeper look at which stocks outperformed in that sector and you see stocks like Dollar Tree (DLTR).  Stocks like Dollar Tree perform well in high-interest rates and/or high inflationary markets. Dollar tree has been expanding its $3 and $5 offerings as well as opening new stores. 


DLTR trades weekly options and trading a 20 delta cash-secured put option is currently offering about $97 for an April 14 expiration. Roughly a 24% annual return on capital.

MARKETS

The VIX, aka the “fear indicator” is printing a reading above 20, which shows a high-volatility environment. 

Short term the VIX is on the rise, meaning we’re seeing an increase in volatility and when that happens we usually see a dip in the overall market.  The VIX hit its most recent high after the announcement that Russia invaded Ukraine and I don’t think we’ll get back to those February highs in the 30s, but I anticipate we’ll see the VIX run up to 27 before a pullback.  

Trading Education

So if you’re tired of watching the news and trying to figure out where the market is going day-by-day, do what we’ve been doing at Traders Reserve for months now.  Look to trade the boring stocks.  As John mentioned in the previous issue, we’re going to be looking at where the money is flowing into the market. 

I want to spend a little bit of time walking you through how you can build a portfolio watchlist.  You can use just about any scanner, but for the purpose of this article, I’ll be using Finviz. If you want to follow along, you can do so here.

With 8 simple rules, we’ve narrowed a list of over 8000 stocks down to 21!  That’s more manageable to find trading opportunities. 

Here’s the breakdown of the number of stocks per sector that pass the scanner:

 

As one might expect, we see stocks coming across in the Financial and Consumer Defensive sectors make the list.

Tomorrow we’ll start going through the list of the stocks and review a handful of them to see if we can narrow the list down more.

If you have any questions, comments, or anything we can help with, reach us at any time.

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