Yesterday you should have been stopped out of the VelocityShares Daily 2x VIX Short Term ETN (TVIX) with a modest loss. That stinks because both stocks and bonds are increasingly vulnerable to a major breakdown soon. In fact, it’s way overdue.
Just take a look at the E-Wave cycle forecasts chart below and you’ll see what I mean …
As you can see, the Dow is just days away from an intermediate high before stocks turn decisively lower this summer. And that’s why we added TVIX, to take advantage of rising volatility as stocks finally decline.
We will look to re-enter this position, but wait for our signal. At the same time, continue to hold your Proshares UltraShort Dow 30 ETF (DXD). We could add to this position, or another inverse ETF, at any time.
There are several looming catalysts that could trigger the selloff, including rising tensions with North Korea, upcoming elections in Europe and front-and-center: This week’s Fed Meeting.
Taper Tantrum Part II
In May 2013, then Fed chief Ben Bernanke casually suggested that the Fed may start tapering its bond-buying program, and panic ensued.
Bond markets sold off worldwide in what came to be known as the “taper tantrum.” In just a few months, long dated U.S. Treasury bonds dropped 12.8% in value, wiping out several years’ worth of meager interest payments in the process.
Fast forward to this week’s Fed meeting, which ends tomorrow, and you can bet all eyes and ears will be tuned into what Janet Yellen has to say about the Fed’s plan to shrink its bloated $4.5 trillion balance sheet.
In plain English, the Fed is discussing how to let maturing U.S. Treasury and mortgage-backed bonds come due without reinvesting the proceeds. That’s a first step toward eventually selling the securities it holds, which could easily disrupt global bond markets all over again.
That’s because reducing its balance sheet is the equivalent of tightening monetary policy in today’s ultra-low interest rate environment.
Look for the Fed to telegraph this process as best they can. The consensus is that they’ll begin the process later this year barring a drastic slowdown in the economy.
Perhaps a more telling clue on the Fed’s intentions will come from this week’s quarterly bond and note auction. I will be curious to see whether they reduce the amount offered.
Meanwhile, markets expect no change in interest rates at tomorrow’s Fed meeting.
But I think focus will turn to the post meeting statement and the Central Bank’s take on the latest cycle of softer U.S. economic data. Specifically, last week’s disappointing first-quarter GDP data, along with last month’s soft jobs report and lackluster manufacturing activity.
I suspect they’ll write it off as “transitory,” with the message keeping the June meeting open for a rate hike. This way the Fed can exude confidence while maintaining a slightly more hawkish tone.
The market is already pricing in a 25-basis point interest rate hike at the June meeting and Fed Funds futures suggest a 50/50 chance of a December rate hike as well. Stay tuned.
We’re looking at several new opportunities right now to take advantage of the projected turn lower in stocks, and we will let you know asap when it’s time to make your next move. So stay alert for more updates and new trades coming your way very soon.
Good investing,
Mike Burnick
