Fed Knocks Markets Lower and You’ll Profit as They Fall

Shah Gilani|June 20, 2022

After the Federal Reserve’s 75-basis-point rate hike on Wednesday, stocks dropped significantly in Thursday’s trading.

That’s no surprise considering many investors fear the Fed’s rate-hike policy could push the U.S. economy into a recession.

With rising rates and a fear of recession as the backdrop, this week, I’m focusing on U.S. Treasuries and consumer discretionary stocks.

Two Ways to Reap 100% Gains in a Down Market

The yield on the U.S. 10-year notes, which are currently at 3.312%, just off their 10 year high of 3.483%.

Since May 30, the yield on the 10-year notes jumped as much as 39.62% on fears of inflation and the Fed raising rates.

I don’t see the Fed slowing the rising rate policy, which means traders will likely be driving those 10-year rates higher on their own.

That being said, last week’s 10.55% increase in the 10-yr yield was a little too much, too fast, in my opinion. I think we could see a short-term pullback before we see rates spike again.

This week, I’m watching ProShares UltraShort 7-10 Year Treasury (PST), an exchange-traded fund that seeks daily investment results that correspond to two times the inverse (-2x) of the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index.

Basically, if the value of the ICE U.S. Treasury 7-10 Year Bond Index goes down, the yield will rise, and so will PST.

If ProShares UltraShort 7-10 Year Treasury (PST) trades back down to $20.65 by June 24, 2022, I like buying the PST August 19, 2022 $21/$22 Call Spread for $0.40 or less. Plan on exiting the PST August 19, 2022 $21/$22 Call Spread for a 100% profit or if PST closes below $20.00.

Next up, I want to shift our attention to consumer discretionary stocks.

iShares U.S. Consumer Discretionary ETF (IYC), is an exchange-traded fund that seeks to track the investment results of an index.

As the name suggests, IYC holds a basket of consumer discretionary stocks, including names like Home Depot, Costco, Mcdonald’s, Walmart, Nike, and Lowes, just to name a few.

If traders continue to fear the U.S. economy is heading toward a recession, IYC (and its consumer discretionary holdings) is likely headed lower, quicker than the general market.

Case in point, since March 29, 2022 the S&P500 has lost 20.65%, while IYC has dropped 27.97% over the same period.

I see that trend continuing.

At this point, I like buying the IYC August 19, 2022 $55/$54 Put Spread for $0.45 or less. Plan on exiting the IYC August 19, 2022 $55/$54 Put Spread for a 100% profit, or if IYC closes above $60.25.