The Risk-On Trade Is Fading, That’s Bad News For Stocks Short-Term

This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.

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July 24, 2020

Stocks  – None

Macro – XBI, XLK, SMH, SPY

Mike’s Reading The Markets Premium Content – $35/Month or $300/Year

MICHAEL KRAMER OWNS XBI PUTS

The risk-on trade may be in serious jeopardy, and that may be bad for the entire market. When digging deeper into ETF trends, it seems that many that have led the market higher are now beginning to roll-over.

The best performing sectors have all been risk-on in sentiment, while anything tied to global growth or risk-off has underperformed. Biotech, Technology, and Semis have all been far and away, the best performing sectors. If these sectors begin to retreat, it likely means the big market rally will turn lower too.  (Premium content – How Low Can Markets Go If The Uptrends Break)

(Mott Capital – Reading The Markets Content)

Biotech (XBI)

The XBI has been the winner this year, rising by 18%. They’re now two bearish signals that have been presented. First, the relative strength has flatlined since April, despite the ETF rising to record highs, a bearish divergence. Now for the first time, we are seeing the RSI sink, and that would suggest that all that bullish momentum is leaving the ETF and sector. 

Additionally, the ETF has now broken a significant uptrend, a drop below $110 likely triggers a deeper move to $105 or less. 

Technology (XLK)

The technology ETF XLK has risen by almost 15% this year. It, too, has a bearish divergence in the RSI, which has now fallen to the lowest level in some time. Additionally, like the XBI, the XLK has broken an enormous uptrend that has been in place since mid-April. Based on the current set up, it appears the ETF could fall to around $99.

Semis (SMH)

The SMH ETF is also flashing the same bearish divergence on the RSI, but it is yet to break the uptrend. With the potential to drop to around $149.

Cooper

Meanwhile, copper prices have been weakening and showing many of the same characteristics as the sector listed above, with a chance for the metal to fall to around $2.65.

10-Year Yields

We have seen a big move lower in yields, with the 10-Year testing support around 55 bps. A break below that support sends yields to around 35 bps.

Finally, the high yield ETF HYG could be on its way back to $80.50.

Just keep an eye on these, they will tell you the direction of the markets next move.

-Mike

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.   

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