Investors Who Are Liquidating To A Cash Position – What To Do Next?

Bank of America, Michael Hartnett, Chief Investment Strategist recently stated, “The bear-market rally for stocks has disappeared as investor concerns about inflation and interest rates linger.” “We’re in a technical recession but just don’t realize it.”

Freight Waves, Henry Byers reported, “US import demand is dropping off a cliff as inbound container volumes to the US are reverting to pre-pandemic levels.” Byers went on to say that “The consumer is getting crushed as conditions for the consumer seem to be getting worse and worse as inflation takes hold and prices get more and more expensive.”

We have quickly moved from seeing the dark clouds on the horizon to the start of entering the initial storm wall. The USD put in a major low on January 6th, 2021. Since then it has been in a strong uptrend as global investors seek safety with the uncertainties about geopolitical events, record inflation, rising interest rates, slowing housing, plummeting auto sales, increasing retail inventories, expanding consumer credit, and pending layoffs.

Relative performance USD

Source: finviz

US DOLLAR ETF: UUP +16.69%

UUP remains in its uptrend as the price continues to move up from its base of accumulation.

After having a brief 2-week pullback of -3.45% UUP has found support and is now looking to extend its bull market trend.

Investors who are liquidating stocks and moving to a cash position could consider UUP to capitalize on the strengthening US Dollar.

INVESCO DB USD INDEX BULLISH FUND ETF • UUP • ARCA • DAILY

USD index for UUP

20+ YEAR TREASURY INVERTED ETF: TBF +38.89%

TBF remains in its uptrend as the price continues to move up from its base of accumulation.

After having a 3-week pullback of -6.21% TBF has found support and is now looking to extend its bull market trend.

Investors who are liquidating stocks and moving to a cash position could consider TBF to capitalize on the FED raising interest rates to try and curb inflation.

PROSHARES SHORT 1X 20+ YEAR TREASURY ETF • TBF • ARCA • DAILY

20+ year treasury ETF TBF

S&P 500 SHORT INVERTED ETF: SH +19.33%

SH remains in its uptrend as the price continues to move up from its base of accumulation.

After having a 2+-week pullback of -7.19% SH has found support and is now looking to extend its bull market trend.

Investors who are liquidating stocks and moving to a cash position could consider SH to capitalize on the falling stock market.

PROSHARES SHORT 1X S&P 500 ETF • SH • ARCA • DAILY

S&P 500 short inverted ETF SH

Valuable Insights From Successful Traders

Market Wizards by Jack D Schwager is packed with insights from successful traders who have shared their wisdom based on firsthand trading experiences. Here are a few of our favorites:

Paul Tudor Jones:

  • “If you have a losing position that is making you uncomfortable, the solution is very simple; get out, because you can always get back in.”
  • “There is nothing better than a fresh start.”

Ed Seykota:

  • “There are old traders and there are bold traders, but there are very few old, bold traders.”
  • “Losing a position is aggravating, whereas losing your nerve is devastating.”
  • “Good traders; Many are called, and few are chosen.”

Larry Hite:

  • “We always follow the trends, and we never deviate from our methods.”
  • “I have two basic rules about winning in trading as well as in life; If you don’t bet, you can’t win.”
  • “If you lose all your chips you can’t bet.”

What Strategies Can Help You Navigate the Current Market Trends?

Learn how we use specific tools to help us understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, we expect very large price swings in the US stock market and other asset classes across the globe. We believe the markets have begun to transition away from the continued central bank support rally phase and have started a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern begin to drive traders/investors into Metals and other safe-havens.

Historically, bonds have served as one of these safe-havens. This is not proving to be the case this time around. So if bonds are off the table, what bond alternatives are there? How can they be deployed in a bond replacement strategy?

We invite you to join our group of active traders who invest conservatively together. They learn and profit from our three ETF Technical Trading Strategies which include a real estate ETF. We can help you protect and grow your wealth in any type of market condition. Click the following link to learn more: www.TheTechnicalTraders.com

For a look at all of today’s economic events, check out our economic calendar.

Chris Vermeulen

Combing Through Data – Looking For Clues About Volatility, USD & Stocks

We are now seeing that major economies (US/UK/Japan) are not immune from global deleveraging and inflation. As investors seek safety in the US Dollar this may eventually trigger a broader and deeper selloff in U.S. stocks and market volatility will begin to pick up as the VIXY moves up. As the USD continues to strengthen corporate profits for US multinationals will begin to disappear.

Especially in times like these, traders must understand where opportunities are and how to turn this knowledge into profits. Part of what we do at www.TheTechnicalTraders.com is to distill price action into technical strategies and modeling systems. These assist us in understanding when opportunities exist in the US stock market and specific sector ETFs. Our core objective is to protect capital while identifying suitable opportunities for profits in trends.

Volatility May Have Bottomed Setting the Stage for a Trend Higher

Volatility is beginning to pick up as we see the VIXY moving up strongly from its 6-month base.

Utilizing multiple time frame analysis and then focusing on the 4-hour chart we were able to capture the volatility low earlier than we would have by only using the daily, weekly, or monthly chart.

VIXY – ProShares Trust VIX Short-Term Futures ETF: 4-Hour

Volatility VIXY chart

The USD Is Up Vs All Other Major Currencies

The US Dollar is continuing to appreciate as investors and central banks seek safety from geopolitical, inflation, and other market dislocations. The low in the USD was made on January 6, 2021.

1 Year Relative Performance (USD) – finviz.com

USD relative performance chart

UUP – Invesco DB USD Index Bullish Fund ETF: Daily

USD Index chart

Stocks Meet Resistance and Are Slipping Again!

Stocks hit resistance the first week of 2022 after hitting a Fibonacci iteration of 2.1618. Less than two months later the SPY found support at yet another Fibonacci number of 1.618. These Fibonacci levels are based on the range calculation of the pre-Covid high and the Covid March 2020 low.

However, after rallying from the 1.618 level the SPY rolled over to the downside as it hit a 72-bar (12-day) Bollinger Band using a standard deviation setting of 1.618.

Now we will watch closely to see if the price will make a new low for 2022 which may confirm a shift in the overall trend in stocks.

SPY – SPDR S&P 500 ETF Trust: 4-Hour

SPY trending chart

Inverse ETFs Offer an Alternative to Traditional Buy and Hold

Astute traders who want to do more than liquidate part or all their stock holdings may want to consider investing in an inverted ETF. Inverted ETFs provide the ability to take advantage of a downturn in the stock market without the complexities of having to sell individual stocks short.

If our goal as a trader is to make money, we need to adapt and be as agile as necessary. This is one of the reasons why our team continually tracks global money flow according to each country’s stock index but additionally other types of markets and asset classes. Our quantitative trading research is crucial in determining which markets to trade and how to efficiently employ trading capital.

Since we reviewed the SPY uptrend and the potential for a change of trend to the downside; it’s only appropriate to view the opposite side of this trade by looking at the SH inverted ETF.

SH – Proshares Short S&P 500 ETF: 4-Hour

SH inverted ETF chart

Understanding Price Is a Game-changer

As technical traders, we follow price only, and when a new trend has been confirmed, we change our positions accordingly. We provide our ETF trades to subscribers. Recently, we entered new trades, all of which hit their first profit target levels and then eventually triggered their break-even profit stop loss orders on their remaining position.

After booking our profits we are now safely in cash preparing for our next trades. Our models continually track price action in a multitude of markets and asset classes as we track global money flow. As our models generate new information about trends or a change in trends, we will communicate these signals expeditiously to our subscribers and to those on our trading newsletter email list.

Successful trading is not limited to when to buy or sell stocks or commodities. Money and risk management play a critical role in becoming a consistently profitable trader. Correct position sizing utilizing stop-loss orders helps preserve your investment capital and allows traders to manage their portfolios according to their desired risk parameters. Additionally, scaling out of positions by taking profits and moving stop-loss orders to breakeven can complement ones’ success.

What Strategies Can Help You Navigate the Current Market Trends?

Learn how we use specific tools to help us understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, we expect very large price swings in the US stock market and other asset classes across the globe. We believe the markets have begun to transition away from the continued central bank support rally phase and have started a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern begin to drive traders/investors into Metals and other safe-havens.

We invite you to join our group of active traders and investors to learn and profit from our three ETF Technical Trading Strategies. We can help you protect and grow your wealth in any type of market condition by clicking on the following link: www.TheTechnicalTraders.com

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

Trading Major Indices With Multiple-Time Frame Analysis

There are many benefits to utilizing multiple time frame analysis in your trading. Some of the standard time frames are monthly, daily, weekly, 4-hour, 1-hour, etc. Longer-term traders may also monitor quarterly and annual charts for clues in market price action.

Some traders use this process to hedge their position using options or an inverse ETF. Others use multi-time frame analysis to enter new positions by exploiting counter-trend moves within a trending market.

Longer time frames tend to be more reliable but shorter time frames can reduce risk. Experienced traders who utilize multi-time frames seem to be able to extract the best from all time frames to improve their overall trading efficiency.

Using the SPY ETF (S&P 500) we will look at a simple example of this type of time frame analysis utilizing the daily and a 4-hour chart:

In early January 2022, the SPY reacted at 2.618% of its Covid 2020 price drop.

The -14.55% price drop lasted approximately 50 days until the SPY found buying support at 1.618%.

This price drop took out the 4th quarter 2021 SPY low and the drop was also greater than any other drop that had occurred during the 2020-2021 bull rally.

SPY – SPDR S&P 500 ETF TRUST – Daily Chart

multiple time frame analysis

TheTechnicalTraders – TradingView

SPY Price Drop of -14.55% Violated its 4TH Quarter 2021 LOW

The SPY 4-hour chart shows us the exact same price information as the SPY daily chart. However, in viewing the 4-hour chart we have 6 times as many bars (1-day equals 24 hours and 24-hours equals 6 4-hour bars).

One example of how this might benefit us is when using a 72-period Bollinger Band on a daily chart this would represent a calendar quarter. While a 72-period Bollinger Band on a 4-hour chart is equal to 12- days or one-half of a month.

As we shorten the timeframe of our chart it is like we are looking through a magnifying glass which allows us to see our price data in greater detail.

Once the SPY price violated its 4th quarter 2021 low we were signaled or given a clue that it may be time to liquidate our long positions and consider purchasing an inverse ETF to the SPY like SH.

The 4-hour SPY chart utilizing a 72-period (12-day) Bollinger Band provides us with an excellent opportunity to take profits on our previous long positions by liquidating.

72-period Bollinger Band: 72 4-hour bars equal 288 hours divided by 24 gives us 12-days.

SPY – SPDR S&P 500 ETF Trust – 4-Hour Chart

multiple time frame analysis

TheTechnicalTraders – TradingView

Using a Multi Time Frame Strategy to Purchase an Inverse ETF

There are different reasons for utilizing an inverse ETF. A trader may want to hedge their profit in the underlying market, or a trader may want to sell the market short outright. Regardless of the trader’s motive, an inverse ETF can provide additional benefits and flexibility.

As we analyze the SPY and how it violated its previous quarter low, we need to consider that the SPY may be transitioning out of its bull market phase.

An alternative strategy or counter-strategy is to purchase a SPY inverse ETF like SH – ProShares Short S&P 500. A simple explanation of the inverse is that when the S&P 500 loses SH will gain or when the S&P 500 gains SH will lose. The goal of the SH ETF is to be as close as possible to the exact opposite of the S&P500 index (SPY ETF).

Since SH is an inverse ETF we want to look for a place to buy SH using a multi time frame analysis chart such as the 4-hour chart. The 72-period Bollinger Band (12-day) just gave us a ‘Buying Zone’.

SH – ProShares Short S&P 500 ETF – 4-Hour Chart

multiple time frame analysis

TheTechnicalTraders – TradingView

Knowledge, Wisdom, and Application Are Needed

It is important to understand that we are not saying the market has topped and is headed lower. This article is to shed light on some interesting analyses of which you should be aware. As technical traders, we follow price only, and when a new trend has been confirmed, we will change our positions accordingly. We provide our ETF trades to our subscribers, and in the last six trades we entered in March, all have now been closed at a profit! Our models continually track price action in a multitude of markets, asset classes, and global money flow. As our models generate new information about trends or a change in trends, we will communicate these signals expeditiously to our subscribers and to those on our trading newsletter email list.

Successful trading is not limited to when to buy or sell stocks or commodities. Money and risk management play a critical role in becoming a consistently profitable trader. Correct position sizing utilizing stop-loss orders helps preserve your investment capital and allows traders to manage their portfolios according to their desired risk parameters. Additionally, scaling out of positions by taking profits and moving stop-loss orders to breakeven can complement ones’ success.

What Strategies Can Help You Navigate the Current Market Trends?

Learn how we use specific tools to help us understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, we expect very large price swings in the US stock market and other asset classes across the globe.

We believe the markets have begun to transition away from the continued central bank support rally phase and have started a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern begin to drive traders/investors into Metals and other safe-havens.

Historically, bonds have served as one of these safe-havens, but that is not proving to be the case this time around. So if bonds are off the table, what bond alternatives are there and how can they be deployed in a bond replacement strategy?

We invite you to join our group of active traders and investors to learn and profit from our three ETF Technical Trading Strategies. We can help you protect and grow your wealth in any type of market condition by clicking on the following link: www.TheTechnicalTraders.com

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

Major Indexes Continue To Be Outperformed By Energy & Metals

ETFs like XOP (S&P Oil & Gas Exploration & Production), XME (S&P Metals & Mining), and XLU (Utilities) have been experiencing capital inflows. At the same time, other ETFs such as DIA (30-Industrials), SPY (500-Large Caps), IWM (2000-Small Caps), IYT (Transports), and QQQ (100-Nasdaq Largest Non-Financial) are still in the red for the year.

Our positions in energy and precious metal ETFs netted us a positive return, while our recent trades in the major stock index ETFs had already booked partial position profits, with the remainder of the positions stopping out for a small break-even profit.

As we experience record inflation numbers reported and central banks raising their lending rates, we are keeping our cash ready and closely monitoring key ETF sectors as compared to the major stock index benchmarks for clues regarding our location within the overall economic cycle.

SPY – SPDR S&P 500 ETF TRUST – DAILY SECTOR COMPARISON CHART

Major Indexes SPY

TheTechnicalTraders – TradingView

TACTICAL ETFs FOR ALTERNATIVE STRATEGIES

From time to time, we get questions from our subscribers regarding inverse and leveraged ETFs. Inverse and/or leveraged ETFs are not appropriate for everyone. However, for some experienced traders, these tactical ETFs can provide alternative strategies for use in a bear market.

An inverse ETF is an exchange-traded fund (ETF) constructed by using various derivatives to profit from a decline in the value of an underlying benchmark. Inverse ETFs allow investors to make money when the market or the underlying index declines, but without having to sell anything short.

A leveraged exchange-traded fund (ETF) is a marketable security that uses financial derivatives and debt to amplify the returns of an underlying index. While a traditional exchange-traded fund typically tracks the securities in its underlying index on a 1:1 basis, a leverage ETF may be structured for a 2:1 or even a 3:1 ratio.

These ETFs listed below track the underlying S&P 500 benchmark that represents 500 US large caps as selected by S&P’s Index Committee. These ETFs are examples of both inverse and leveraged ETFs:

  • SPY vs. SH (1:1 or 1x leverage) – SPY (Bull) is the most recognized ETF and is typically listed in the top ETFs for the largest AUM and greatest trading volume. SH (Bear) provides 1:1 inverse exposure to the S&P 500.
  • SSO vs. SDS (2:1 or 2x leverage) – SSO (Bull) seeks a daily 2x return of the S&P 500. SDS (Bear) provides 2:1 inverse exposure to the S&P 500.
  • UPRO vs. SPXU (3:1 or 3x leverage) – UPRO (Bull) seeks a daily 3x return of the S&P 500. SPXU (Bear provides 3:1 inverse exposure to the S&P 500.

SPY – SPDR S&P 500 ETF TRUST – DAILY S&P 500 COMPARISON CHART

The following chart gives us a visual of how the ETFs mentioned above are performing against each other over the past 15-months. It should be noted that inverse ETFs carry unique risks that traders should be aware of before participating in them. Some of the risks associated with inverse ETFs are compounding risk, derivative securities risk, correlation risk, and short sale exposure risk.

Major Indexes SPY

TheTechnicalTraders – TradingView

KNOWLEDGE, WISDOM, AND APPLICATION ARE NEEDED

It is important to understand that we are not saying the market has topped and is headed lower. This article is to shed light on some interesting analyses of which you should be aware. As technical traders, we follow price only, and when a new trend has been confirmed, we will change our positions accordingly. We provide our ETF trades to our subscribers, and in the last six trades we entered in March, all have now been closed at a profit! Our models continually track price action in a multitude of markets, asset classes, and global money flow. As our models generate new information about trends or a change in trends, we will communicate these signals expeditiously to our subscribers and to those on our trading newsletter email list.

Successful trading is not limited to when to buy or sell stocks or commodities. Money and risk management play a critical role in becoming a consistently profitable trader. Correct position sizing utilizing stop-loss orders helps preserve your investment capital and allows traders to manage their portfolios according to their desired risk parameters. Additionally, scaling out of positions by taking profits and moving stop-loss orders to breakeven can complement ones’ success.

WHAT STRATEGIES CAN HELP YOU NAVIGATE The CURRENT MARKET TRENDS?

Learn how we use specific tools to help us understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, we expect very large price swings in the US stock market and other asset classes across the globe. We believe the markets have begun to transition away from the continued central bank support rally phase and have started a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern begin to drive traders/investors into Metals and other safe-havens.

Historically, bonds have served as one of these safe-havens, but that is not proving to be the case this time around. So if bonds are off the table, what bond alternatives are there and how can they be deployed in a bond replacement strategy?

We invite you to join our group of active traders and investors to learn and profit from our three ETF Technical Trading Strategies. We can help you protect and grow your wealth in any type of market condition by clicking on the following link: www.TheTechnicalTraders.com

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

 

Portfolio Hedging in Action Using the ProShares Short S&P 500 ETF

While I am no advocate of a market crash in a context where the economic recovery remains on track and unemployment numbers have dropped to their lowest since February 2020, I certainly have in mind that the highest inflation reading in nearly 40 years has raised the probability of occurrence of stock market volatility in 2022.

In this scenario, risk limitation to financial assets in the form of a hedging strategy is important, especially when investors have patiently built their portfolio over the years, and want to remain invested in equities. In this respect, there are many ways to hedge including treasury bonds and commodities ETF as well as derivatives, such as options and futures contracts.

In this thesis, I consider a hedging tool that involves taking an opposite position to a related asset and which worked during two of the most recent market crashes, namely the 2008-2009 great financial crisis and the 2020 Covid-related downturn. This tool is the ProShares Short S&P 500 ETF (SH) and it inversely tracks the broader stock market or the S&P 500. For investors, it is important to test its efficacy and show how it actually works using the SPDR S&P 500 ETF (SPY).

Testing SH’s efficacy to provide inverse market correlation

When SPY which straightly replicates the gains or losses of the S&P 500 plunged by more than 45% from 2008 to 2009, the ProShares fund conversely managed to gain more than 30%. This is shown in the chart below. Subsequently, when SPY lost 50% from Jan to March 2020, SH gained 25%. These two events are illustrated in the chart below and show the ability of the market shorting tool to provide inverse correlation to the broader market.

Source: Trading View

Pursuing further, some of you would have noticed that SH’s returns are not -1x or exactly the inverse of SPY. The reason for this discrepancy is due to the compounding effect which adversely impacts the performance of leveraged ETFs like SH, whereby the returns are significantly different than the target return for periods that exceed one day. It is for this reason that the fund managers at ProShares advise investors to monitor holdings frequently, preferably on a daily basis.

Being more specific, items to monitor are the performance of SPY itself, which if on a consistent uptrend has the potential to inversely cause a significant downside in SH’s share price, and by ricochet trim the gains one expects to obtain when shorting the market does not proceed as expected. Along the same lines, failure to monitor will certainly result in capital losses as evidenced by SH’s downtrend (blue chart) since inception in 2007 by nearly minus 90% (-90%). Thus, contrarily to SPY which is a long-term investment, SH is a market shorting tool that enables investors to benefit from a downturn without having to trim down their equity portfolio. This explanation would be incomplete without seeing hedging in action using a sample portfolio.

Illustrating how hedging works with a sample portfolio

For illustration purposes, I consider a $10,000 investment in equities made through shares of the SPY. This could form part of a 70/30 portfolio, with 70% equity and 30% fixed income.

The first scenario (scenario 1) which is un-hedged entailed a loss of $4,500 during the 2008-2009 great financial crash as SPY lost 45% on an investment of $10K. Next, the second scenario depicts the same time period but, this time with the application of a hedge in the form of a $1000 investment in SH, or 10% of the equities portfolio. As a result, $9000 was invested in SPY and the losses were reduced to $3,750.This excludes ProShares’ expense ratio of 0.88%, which make up for only $8.8 on a $1,000 investment. Ultimately, this shows that hedging using the ProShares ETF actually works. Now, the percentage at which a portfolio is hedged can vary, with 5% and 15% hedges being quite common.

Source: Prepared by author.

Pursuing further, I have provided two other scenarios for an un-hedged and hedged portfolio respectively and this time pertaining to the March 2020 market crash. Again, even after excluding ProShares’ fees which is minimal, hedging, as a damage limitation mechanism works, but, it is essential to monitor the performance for the period the market is shorted. For this matter, there is the need for “optimum timing” for entering and exiting a position in SH in order to capture the “best case” impact of the hedge.

On a cautionary note, bear in mind that historical performance is not a guarantee of future success and that each time it a different hedging scenario.

Finally, given high inflation with a CPI of above 7% and the CBOE S&P 500 Volatility Index (VIX) hovering between 19 and 20, the risk factors are certainly here.

Disclosure: This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.

For a look at all of today’s economic events, check out our economic calendar.