Since the big CPI and PPI prints earlier this week, markets have been trying to figure out direction and sentiment. What will be the outcome of continued higher inflation prints?

Capital markets seem to be a bit confused as to what to do next. As Federal Reserve Chair Powell testified in front of House and Senate committees over the last two days, there doesn’t seem to be any additional clarity in my eyes.

I wanted to wait until the Fed’s 2-day testimony concluded before publishing today’s opinion piece to gain any additional clarity on the markets.

There is a conundrum that exists right now. We keep getting higher inflation readings, and the Fed has already telecasted that higher rates are in the cards in 2023 (maybe 2022). Inflation is a problem and needs to be tamed. One way of taming it is to raise interest rates. There are other tools at the Fed’s disposal to tame interest rates like tapering and more. The question becomes, at what point is action going to be taken?

As the Fed testified in Congress yesterday and today, interest rates fell and the price action seemed anything but typical following Wednesday’s poor 30-year bond auction. We get it, the markets are addicted to low interest rates, but unless hyperinflation is the goal, it feels like something needs to change soon. When will the Fed begin tapering bond buying? How about some incremental tapering or very fractional interest rate increases such as an eighth of a percentage point or something? If something doesn’t change soon, we could be heading for a 1981 style inflationary environment. Rates are going to have to rise, and the stock market is not going to like it. However, action needs to be taken.

Will the US equity markets be able to maintain their upward trajectory?

All of this stimulus, decade-plus near-zero interest rates, bond buying, and market addiction to easy monetary policy will have repercussions eventually.

Since we have been analyzing TLT, let’s take a look at the 30 Year Bond Futures:

Figure 1 - U.S. Treasury Bond Futures July 8, 2021 - July 15, 2021, 1 Hour Candles Source stooq.com

The puzzling price action (or perhaps not so puzzling in retrospect given the 2-day Fed testimony) is the creep higher after the weak demand shown in Wednesday’s 30-year bond auction. If you were short bonds at this time via TLT or any product, things were looking good. Since that auction, we had the Fed testimony, which showed many select congress members pleading for interest rates to be kept low. Unfortunately, if rates remain at rock bottom levels, it seems like inflation could spiral out of control. This continued inflation would be bad for the American people.

It is unusual price action; to say the least. The 30-year bond auction was priced at 2%, and demand was extraordinarily weak. There is a solid explanation of this most recent bond auction on Barrons.

However, today, we have 30-year bonds catching a bid near 1.94%. Yes, it is illogical. Yes, markets can be illogical for extended periods.

Looking at the 30-year bond from a perspective of yield:

Figure 2 - U.S. 30 Year Treasury Bond Yield July 7, 2021 - July 15, 2021, 1 Hour Candles Source stooq.com

Fed’s James Bullard, Federal Reserve Bank of St. Louis President urged for tapering of bonds earlier today.

At the time of writing, we have the bonds continuing to be bid with the $SPX moving lower. The message of the market is exhibiting signs of change in my eyes. I don’t want to sound any overall warning bells just yet, but I am tuned in all day, every business day.

To sum up the current viewpoint and opinion:

I have BUY opinions for:

• SPDR S&P Bank ETF (KBE) between $48.11 - $49.39/$50.00. Update 07/15: This has held well given the overall market sentiment. Always use a stop loss level that caters to your individual risk tolerance.
• Defiance Quantum ETF (QTUM) between $44.00 - $49.50. Update 07/15: This one is sitting right above the 50-day moving average near $48.02. Always use a stop loss level that caters to your individual risk tolerance.
• Amplify Transformational Data Sharing ETF (BLOK) Update 07/15: We are below the 200-day moving average ($41.84) at the moment. I have been waiting for this, but instinct tells me that Bitcoin could move lower. I want to wait another day and see what transpires. Stay tuned. Always use a stop loss level that caters to your individual risk tolerance.
• Invesco MSCI Sustainable Future ETF (ERTH) between $65 and $66. Update 07/15: Here we are near $65. If you like the theme, today could be a day to take action. Always use a stop loss level that caters to your individual risk tolerance.
• Invesco Solar ETF (TAN) Update 07/15: Getting close to the 50-day MA of $80.35. If not on board, wait for a pullback; this one can move erratically in both directions. It seems to have a strange correlation to the overall equity market direction on some days. Targeting $100 - $125. Always use a stop loss level that caters to your individual risk tolerance.

I have SELL opinions for:

• iShares 20 Plus Year Treasury Bond ETF (TLT) when $TNX trades 1.291% or at the 200-day moving average of TLT ($148.47) / $147.75 - $148.47. Risk to 2nd sequential daily close above $153.16. Update 07/15: Bonds went from looking amazing on Wednesday’s close to not looking great at the moment due the Fed’s 2 day testimony appearing to be dovish. While concerning, let’s stick to our original plan and remove the emotion from the trade. I hate to let a winning trade turn negative, but it does happen - and this happened quickly thanks to the Powell testimony. Always use a stop loss level that caters to your individual risk tolerance.

I have a HOLD opinion for:

• First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID). Update 07/12: This has been a favorite. I have moved it to hold, as I do not suggest chasing it here. This has been a buy opinion from the May 6th publication between $86.91 - $88.17 Hold longs. I have liked this one for a longer-term-swing trade or longer-term holding, and am looking for signs to ring the register. Today, we are trading $94.41 the last time I checked, and I think it has a little more gas in the tank. Stay tuned. Always use a stop loss level that caters to your individual risk tolerance.
• Invesco Exchange-Traded Fund Trust - S&P SmallCap 600 Pure Value ETF (RZV) on pullbacks. Update 07/15: Moved to hold with overall market weakness and small caps lagging. Always use a stop loss level that caters to your individual risk tolerance.
• iShares Global Timber & Forestry ETF (WOOD) Update 7/15: Given the plummet in lumber, let’s just hold here. This one can be good for diversification, if nothing else, for now. See the June 16th publication to consider the first tranche of buying between $86.50 and $87.50. Look to add the 2nd tranche between $81.62 (200-day SMA) and $80.00. We are trading at $89.39 (last time I checked). Always use a stop loss level that caters to your individual risk tolerance.

Thanks for reading today’s Stock Trading Alert. Let’s stay unemotional and disciplined heading into CPI and earnings. Your readership is appreciated. Have a great day!

Thank you,

Rafael Zorabedian
Stock Trading Strategist