Zoom Stock – 3 Stocks to Trade After the Federal Reserve Event
The Federal Reserve concluded its two-day meeting and presented its decisions. The price action in the stock market was wild. Investors were looking for a date as to when they will taper. They didn’t get it, so they threw a mini hissy fit. In the wake of the Fed’s statement and the Q&A session that followed, there are stocks to trade with better conviction into the rest of this year.
So far, the Federal Reserve policy has been extremely and completely bullish. Fed Chairman Jerome Powell and his teammates have gone above and beyond their duties babysitting the stock market. The message from yesterday’s press conference shook equities a bit but the end result was a tame -0.6% in the S&P 500. Clearly this is not a correction, even though it felt harsh.
I have my takeaway from what I heard, so I want to look for changes in trends early. Today we will discuss three stocks to trade based on that concept. The opportunity is to find these tickers before the masses. To have confidence in our findings we should understand what the Fed said.
The gist of the message was they’ve done their job and things are great. Too great perhaps, so soon they will consider tapering – and that’s new. Powell didn’t quite announce a taper program, nor did he commit to a specific date. He was careful to reassure us they will give a heads-up.
This is silly because there will be an initial shock from the heads-up itself. But knowing that it is coming changes conviction of current ongoing trends. This is especially true in currencies, commodities and the bond market. The tone was very clear that they are not afraid of acting when appropriate.
This limits the exuberance levels on a few fronts. However, stocks like Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Tesla (NASDAQ:(TSLA)) can still do well. They have earned their levels from great scorecards. But for a few ongoing top line trends there will be struggles. The Fed now has almost twice as many members itching to reduce the QE. Although this is not an official policy change, it shows attitude.
The extreme tailwinds that we have now are going to get weaker. This will affect specific sectors like bank stocks to pick one. Clearly this is a fluid situation, so conviction has to be realistic. Investor should not take full positions and they should definitely employ proper stop losses.
Today’s three stocks to trade in the aftermath of the FOMC event are:
- ProShares UltraShort 20+ Year Treasury (NYSEARCA:TBT)
- Invesco DB US Dollar Index Bullish Fund (NYSEARCA: UUP)
- Energy Select Sector SPDR Fund (NYSEARCA:XLE)
Stocks to Trade: ProShares UltraShort 20+ Year Treasury (TBT)
Bond prices have had a tough year, down 10% while the S&P is up 13%. It’s 50% worse if you look back 12 months. This is not supposed to happen because of TINA. The U.S. bonds are the only major ones that actually pay any reward. Overseas, if you lend the governments money through bonds, they ask for more of it in negative yields. This should set a floor under the TLT stock but that hasn’t been the case.
Even after this 6% June rally, TLT is still down 22% from the pandemic high. There were rallies but they failed to sustain a positive trend. This time it could be different because it could be in a three-month-old base for a rally. To trade it, I would use the TBT stock. It is inversely related to the TLT and has a -2 to 1 leverage. If I am right about this, the profits from a downturn in the TBT is the opportunity. I know it’s confusing switching tickers on you but let’s recap: TLT represents bond prices and TBT represents bond yields. These two always move in opposite direction.
The safest way to short the TBT is to use the options markets. These days, shorting anything via traditional methods is nuts. The Reddit effect makes that unlimited risk even more dangerous than ever. Using options allows investors to allocate a finite amount for the bearish trade and nothing more. Usually this is easiest by owning a put or a debit put spread. Selling call spreads would also work and those don’t even need a drop in the TBT to win.
The bottom line, TBT stock should have seen its highs for now. There will be sellers lurking going into $20.50. Conversely if it loses $19.30, the downside target could be 10% lower. There are support zones in between but the momentum could be too strong for them.
Invesco DB US Dollar Index Bullish Fund (UUP)
The U.S. dollar has badly under-performed the S&P 500 at least for a year. What’s worse it has failed to live up to its potential given our Treasury yield’s global supremacy. In the past, having positive yields while the rest have negative yields translated into a stronger currency. Not this time.
What is at play is a push-pull effect between that notion and having the largest stimulus ever. The trillions that the White house and the Fed have poured into the system diluted the dollar. But that may be about to change. If the Fed is closer to tapering, then bids will return to the greenback.
I like using the UUP options to put thesis into action. The cost up front is my maximum risk and I don’t have to be a Forex expert. Another reason the dollar should gain is that the U.S. was early with its aid programs. I bet the rest will have to also issue their own QE.
Trying to catch the UUP knife has been difficult so I don’t anticipate this will be easy. It is worth the try since the risk of failure is finite. The upside potential could resemble that of the one from April of 2018.
Stocks to Trade: Energy Select Sector SPDR Fund (XLE)
The third ticker on this list of stocks to trade today is related to the UUP thesis. If I am right about the U.S. dollar recovering then there will be downside pressure on everything priced in it. This includes all commodities and things like gold. Among them oil is the one most vulnerable.
The recovery in oil from the pandemic bottom was impressive. Too impressive because now Wall street giants like Goldman Sachs (NYSE:GS) are calling for explosive demand on oil. I would take the other side of that argument for many reasons. First, the whole world is now seeking ESG investing, so there is downside pressure from that. Second, all major car manufacturer have also committed to eliminating fossil fuel motors this decade. Third, the lockdown made telecommuting a real thing. We now use Zoom (NASDAQ:ZM) for meetings, so we are flying less. There is no way I believe that demand is explosive relative to pre-pandemic levels. Besides, the higher the price of crude, the more Western pumpers come back online. This is a Catch-22. The only fuel to this great oil rally is rhetoric.
I am choosing to not short crude oil or the United States Oil Fund (NYSEARCA:USO). Instead I want to pick on the XLE stock. This is an ETF of stocks. Exxon (NYSE:XOM) and Chevron (NYSE:CVX) are 45% of it, and their stocks have been awesome. Their biggest draw is the massive dividend that they pay. As a result, their valuation now is out of whack. And if the Fed is indeed close to raising rates then the dividend argument weakens. Yesterday, the Utilities Select Sector SPDR Fund (NYSEARCA:XLU) fell three times harder than the S&P. They are a bunch of dividend payers and the decline somewhat confirming my thesis.
Lastly, the XLE is coming up against a big pivotal level from January 2020. Back then, the oil market collapsed to the very famous negative number in April of last year. Coming back into such a big accident scene, it is likely to find sellers. I would favor the fade scenario back down to $48 per share. It would make for a better long there.
Until then I would be bearish this stock with tight stops. It is possible that the rhetoric continues to push it past $57 per share. If so, bears should get out and try again higher.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.