Rate Train from Hell

Estimated read time: 2 minutes and 28 seconds

In this week’s market recap email

1. Market recap

2. Skills/methods I used this week

3. What's in and what's out of my portfolio

What Happened This Week

YTD returns:

• S&P 500: -24.7%

• Nasdaq: -32.4%

• Russell 2000: -25.7%

• Top holding position US Dollar ($UUP): +17.67%

ONE. DAY. DIFFERENCE.

I mean seriously, this guy should be locked in jail (he is after all an Eagles fan, which I am as well so I'm able to say that).

No "chart" should be screaming BUY right now....not when the VIX is > 30.

The saying goes: "markets crash from oversold conditions" - Keith McCullough, Hedgeye

If you look at a chart in March after the selloff, would it have been a good idea to buy just because things were on "sale"? How about May? Now?

And the scary part about all of this....we're just getting this bear market started.

With the quarterly outlook looking to slow SEQUENTIALLY over the next 3 quarters, we are no where near a bottom.

And that's on growth - now do inflation:

Cool, so what does the Fed have to do to fight inflation? Raise rates.

And what is detrimental to a slowing economy? Raising rates.

How will the fed inevitably drive us further into a recession? Yeah, you know the answer. 

Teaching Moment

Rates.

Getting tired of this word yet?

No but seriously, there's a pretty common theme with most of these posts - almost all of them are understanding where yield curves are trading at. You can position accordingly in your portfolio if you understand rate-sensitive securities.

Behold the 10s-2s spread: a measure of the 10 year curve minus 2 year curve:

We've touched on this is prior posts but there's a reason why we keep bringing it up. Inverted yield curves (i.e. negative on the 10s/2s) are very concerning for our economy.

When the yield curve becomes inverted, profit margins fall for companies that borrow cash at short-term rates and lend at long-term rates.

The darker-shaded sections of the graph indicate recessionary periods for the economy. Almost every single time (all the time if you count whatever 2020 was) the yield curve is inverted BEFORE we enter that period.

The Fed does not help this by raising rates - since they influence the 2s part of the curve - as slowing growth brings down the 10s part of the curve.

We know the Fed will have to continue hiking rates with inflation staying elevated: 2s UP

We know the economy will slow, sequentially, over the next few quarters: 10s DOWN

Curve = inverted (even more)

You're going to need some scuba gear if you follow Cramer's advice....

In The Account | my top holdings

1. $UUP - US DOLLAR

   1. DIAMOND HANDS

2. CASH

   1. Yes like non-invested, straight cash just sitting in my account. Why? Because you can't lose it that way!

On The Radar | positions I want to build / sizing up

1. NONE

   1. VIX remains > 30 which is NOT a buy signal for virtually anything

Off The Grid | removed positions / short selling opportunities

1. TECH - $XLK, $QQQ

2. FINANCIALS - $XLF, $KRE

3. BASIC MATERIALS - $XLB

4. RETAIL - $XRT

5. HIGH BETA - $SPHB

6. CRYPTO - $BITO, $MSTR

Until next week....

-BW

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.