Trade These Three ETFs to Profit from the Markets’ Big Changes
I’ve been in the trading business for over 40 years, and I know what moves stocks and markets. And I’m telling you, it’s changed.
The dynamic rocking of stocks and markets these days are driven by narratives. More precisely and more importantly, macro-narrative themes.
That’s because macro-narrative themes lead to consensus trades. Those collective trades move markets, which move stocks en masse no matter what firm-specific earnings or news anyone thinks should move individual names.
Of late, meaning since January 2022 and really November 2021 for big tech and NASDAQ stocks, we’ve been in a bear market watching most stocks go down as inflation shot up, seemingly out of nowhere, and the Federal Reserve started raising rates to combat the threat to standards of living.
Here’s the narrative attached to that: the Fed’s raising rates to combat inflation, so the easy money days that helped pump up stock valuations are behind us, and the inflated financial markets bubble has popped. This is especially true for big tech, which benefited the most valuation-wise. So, the of-late consensus trade was: sell stocks and short them.
That’s how we got here.
Now there are two new competing macro-narrative themes pushing and pulling traders simultaneously, leading market-maker dealers to two kinds of consensus trades. Either it’s “buy beaten-up stocks and call options in case we get a ‘melt-up,'” or it’s “use rallies to take any profits you have and establish short positions.”
So, which narratives do you trade on? What do you pay attention to?
The correct answer is to trade off the markets, not off narratives, using support and resistance levels to pick your entry and exit points and trade benchmark ETFs like SPY, QQQ, or DIA.
Let me show you how.
These Are the Themes Driving Market-Makers Right Now
The evolution of trading based on narratives or news stories, whether it’s right or wrong, factual or fanciful, makes sense because the world we live in is hyper-connected thanks to the Internet and always in our faces, all the time. That connectivity means we mostly see and hear a lot of the same things courtesy of too few independent sources of financial and social mainstream media.
Those sources are continually pushing one of these two narratives right now, broadly speaking.
Macro-narrative theme #1: The Fed’s nearing the end of its rate hiking cycle, will pause, then have to pivot (pivot is Fed-speak for lower rates) as inflation, already trending lower, becomes manageable. Because the Fed wants to take credit for an economic “soft-landing,” they’ll aid and abet it by pivoting in the second half of 2023. If you believe this, you’re in the “buy beaten-up stocks and call options in case we get a ‘melt-up'” camp.
Macro-narrative theme #2: The Fed will overshoot with its rate hikes, keep rates too high for too long to prove they’re bona fide inflation fighters, and the economy will sink into a recession. Earnings will come down as analysts cut future growth projections and tapped-out consumers go on strike. If you believe this, you’re in the “use rallies to take any profits you have and establish short positions” camp, because you’re expecting markets to test their lows and break them as a recession for the economy and earnings comes more into view.
Within the two major and competing macro-narratives are a host of sub-narratives. Here are a handful you’ll probably see:
- “China reopening will lift the global economy and lift stocks” vs. “China’s reopening will result in a head-fake pop as Covid deaths mount and China shuts down late winter-early spring when citizens lock themselves down”
- “Earnings are holding up and so far we’re still seeing earnings growth even if that growth is slowing” vs. “Analysts are behind the curve in cutting earnings estimates, and as they start cutting deeper than expected, stocks are going to come down hard”
- “Stocks are cheap down here and investors aren’t nervous as measured by the VIX around and below 20” vs. “The VIX plumbing lows with an 18 handle recently is a head-fake, since so many investors are scared and out of the market they don’t need to buy put options as a hedge” vs. “The VIX is low because traders are buying call options 30-plus days out to quell their FOMO thinking, so we could see a melt-up”
- “The S&P 500 can’t get above significant resistance or the down trending bear market channel market and that’s bad news” vs. “The S&P is consolidating and when it breaks above resistance a ton of sidelined capital will pour into the market and we’ll get a melt-up.”
You get the idea.
These are the important macro and secondary narrative themes driving traders to buy and sell… and then sell and buy.
It’s a mess, right? And trying to figure out who’s “right” and who’s “wrong” is an even bigger mess. That’s why trading the market is a better strategy overall.
How to Trade the Market Right Now
As I said above, the basic strategy is to use support and resistance levels to trade benchmark ETFs like SPDR S&P 500 ETF Trust (SPY), Invesco QQQ Trust Series 1 (QQQ), or SPDR Dow Jones Industrial Average ETF Trust (DIA).
Whether you buy dips and test the waters at support levels or fade up days when we get to resistance – that’s up to you. Remember that you’re trading at this juncture, not taking committed positions.
Sure, you could take committed positions, on the long or short sides, be right, and make a lot of money being right. But ask yourself, how committed are you willing to be when there’s no clarity over even the near-term horizon?
Here are the support and resistance levels for the benchmarks you should watch for.
The S&P 500 has support, though not much, at 3875. Then there’s support at 3795 and then at 3650. Below that, and we’re likely going a lot lower.
S&P resistance starts at 3956 (the 7-day moving average), then there’s more at 4000-4016. Above there, if there is consolidation around those levels, which will mean we’re above the down-trending bear market channel marker, we could see something of a melt-up if there’s support from a Fed pause.
The NASDAQ Composite has support at 10,635. Below that, there’s 10,200. It better hold there. Otherwise, look out below.
Composite resistance starts at 11,225. There’s more resistance at 11,600, right about where the bear market channel trend line is. Above there, big tech names could see capital inflows and get a nice pop.
The Dow Industrials have support at 32,825. If they get much below that, they’ve broken down, and you don’t want to speculate much on the long side.
The Industrials have resistance at 34,300 to 34,700. I’m calling that area the triple-top breakout zone. If the Dow gets above there, you don’t want to be shorting the market.
There you have it. Mind your macro-narratives and all the sub-narratives because every trader is keyed in on them no matter which side they’re playing from. If you’re not inclined to be on the sidelines waiting for a clearer horizon, trade the broad market by going long and short on benchmark ETFs, using support and resistance levels to “express yourselves.”
And why not… express yourself!