How Traders Can Combat Rising Inflation And A Softening Market
Stocks rallied yesterday after Chairman of the Federal Reserve Jerome Powell told Congress, “The economy is a long way from our employment and inflation goals.”
Powell was testifying before the Senate Banking Committee. According to The Wall Street Journal, he wasn’t providing new information. He was repeating a message he has been delivering for months:
The Fed will therefore continue to support the economy with near-zero interest rates and large-scale asset purchases until “substantial further progress has been made,” a standard that Mr. Powell said “is likely to take some time” to achieve.
Powell seemed to be trying to reassure the bond market that the Fed will be on hold and rates should remain low. Bond traders have been selling bonds, pushing rates up in recent weeks. The chart below shows rates are rising faster than at any time in the past 20 years.
What This Means
This is a chart of 10-year Treasury yields. After bottoming in July, the yield more than doubled in less than seven months. The seven-month rate of change at the bottom of the chart shows the current move is unprecedented.
Blue lines in the upper portion of the chart show the long-term trend. This is a linear regression of the yields with solid lines one standard deviation above and below the trend. At 2%, yields would be one standard deviation above the long-term trend.
Round numbers like 2% tend to become important to traders at transition points. While that wouldn’t necessarily be the end of the downtrend, it would be important to traders who might fear the move would continue.
That’s why Powell is trying to reassure investors. He was especially reassuring about inflation, saying “that inflation could be somewhat volatile over the next year and might rise due to a potential burst of spending as the economy strengthens. “
But that, he said, would be a “good problem to have” in a world where economic and demographic forces have been pulling inflation down for a quarter of a century.
He said he wouldn’t expect inflation to reach “troubling levels,” and wouldn’t expect any increase in inflation to be large or persistent.
“Inflation dynamics do change over time but they don’t change on a dime, and so we don’t really see how a burst of fiscal support or spending that doesn’t last for many years would actually change those inflation dynamics.”
How I’m Trading Right Now
We know inflation will be rising through the summer because of the depressed state of the economy a year ago. Now, we know the Fed will be reluctant to act. This could provide a foothold for inflation to accelerate. I’ll be watching that.
In the meantime, over at my premium Income Trader service, we will focus on short-term trading opportunities that put income into our pockets right away.
For example, one of my recent trade recommendations is in CME Group Inc. (Nasdaq: CME).
CME operates futures exchanges around the world. It offers futures and options products based on interest rates, equity indexes, foreign exchange, agricultural commodities, energy, and metals, as well as fixed-income products and Bitcoin.
Bitcoin futures can be used to hedge exposure to cryptocurrency. As more and more companies follow the lead of Microstrategy, Tesla, and others by adding Bitcoin to their balance sheet, I expect hedging to become more popular. This will lead to transaction fees for CME and, given the volume of recent transactions in Bitcoin, those fees could be significant.
That’s a reason to consider CME for the long term. However, my focus is on the short term. The stock is on an Income Trader Volatility (ITV) “buy” signal, which means now is an ideal time to benefit from our “pin code” strategy.
Take a look at the chart below. The bottom panel shows my award-winning Income Trader Volatility (ITV) indicator, which we’ve used for years over at Income Trader to identify trade opportunities with a 92% success rate. Right now, ITV is showing a “buy” signal for CME.
The magenta line in the chart is the S&P 500 Index. CME tends to peak after the broad market turns down. This chart shows that pattern in early 2020. With the S&P 500 still in an uptrend, it’s likely CME will rally to a new high even in a broad market selloff.
Action To Take
As you may know, I’ve spent a lot of time over the past couple of weeks discussing the potential for inflation – and the ramifications that could have for investors.
So while there’s a reason to consider a stock like CME for the long term, I’m keeping my focus on the short term.
That’s why we’re using my proven strategy to pocket income from stocks like CME instantly. Because we expect to be in this trade for about 24 days, the annualized rate we expect to make comes out to about 30%. And because we aren’t tying up our capital for long, we can make income trades like this again and again…
It’s incredibly simple to trade like this once you’re up to speed on everything. I can’t think of a better way for investors to protect themselves while earning income in this market.