An Economic Storm is Brewing: Is Your Stock Portfolio Safe?
It seems like everywhere you turn these days, pickleball is popping up. Just last week, a group of my friends and I started a new pickleball club, and before I knew it, we were all hooked. From casual weekend games to ultra-competitive matches, it’s become a fast-paced obsession—well, unless you’re nursing a back injury like I am. Whether you're playing for fun or driven by the thrill of competition, the pickleball craze has swept everyone off their feet. Courts are springing up left and right, taking over everything from tennis courts to unused spaces in once-forgotten shopping malls. Even the pros are getting in on the action, with major athletes endorsing this "sport of the moment."
It reminds me of how certain trends can take the market by storm. Just like the pickleball courts popping up everywhere, we’ve seen major investment trends like Bitcoin, electric vehicles (EVs), and artificial intelligence (AI) reach new heights. The key with any trend, whether in sports or stocks, is knowing when the mania will end and how much exposure you're comfortable with.
This week, we saw a similar wave of excitement hit the financial markets as the latest labor reports were released. Much like gauging your readiness to dive headfirst into a new hobby, investors are eyeing the data closely, weighing how much risk they want to take amid shifting market conditions. Just as pickleball doesn’t seem to be fading anytime soon, neither does the hype around emerging sectors like weight loss drugs, which have captured investor attention recently.
In this week's newsletter, we’ll break down how these reports impacted the markets and explore which trends you might want to "serve up" in your portfolio next.
Recent Trade Review
In our latest trade spotlight, Zscaler, Inc. ($ZS) took center stage, a perfect example of how easy it can be to find winning trades with our Earnings Power Trader (EPT) model. The system pinpointed $ZS for its extreme call-buying demand and elevated gamma levels, signaling a high-probability short opportunity. For those subscribed to our EPT services, this trade was executed seamlessly, following the exact signals our model provided.
If you missed the action, don’t worry! You can watch last Wednesday’s live trading room session, where we fully broke down the $ZS trade from start to finish. Transparency is key at YellowTunnel, and we make sure you can see every step of the process. Check out the full recording here: Live Trading Room Recording.
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CURRENT TRADING LANDSCAPE
The market has kicked off September with a sharp pullback, driven by weaker-than-expected macroeconomic data and heightened volatility. Disappointing labor and economic reports this week have deepened fears that the Federal Reserve may be behind the curve, despite growing expectations of a quarter-point rate cut later this month. All three major U.S. indices saw significant declines, with the Nasdaq down 5.5%, the S&P 500 falling 4%, and the Dow losing 2.7%. The tech-heavy QQQ has dipped below its 50-day moving average, underscoring the broader risk-off sentiment. Looking at these levels, I am seeing S&P 500 resistance in the 560–575 range, while key support lies between 480–510. For reference, the SPY Seasonal Chart is shown below:
The August labor report, a key focus this week, offered little reassurance. Nonfarm payrolls grew by 140,000, missing the forecast of 160,000, while job revisions for prior months shaved off an additional 86,000 positions. The unemployment rate edged down to 4.2%, but wage growth accelerated by 0.4%, stoking fresh inflation concerns. Mixed signals from manufacturing and services data only added to the uncertainty. The ADP payroll report disappointed, and although jobless claims showed some improvement, it wasn’t enough to alleviate fears of a slowing economy.
Despite the broader market struggles, Thursday's session saw tech stocks provide some relief. The “Magnificent 7” mega-cap companies, led by Tesla's 4.7% surge and Amazon's 2% gain, helped the Nasdaq finish in the green, though other sectors faltered. In the bond market, 10-year Treasury yields fluctuated between 3.6% and 4.4%, reflecting continued uncertainty over the Fed's next moves. Interest-rate futures are pricing in a 60% chance of a quarter-point rate cut at this month's FOMC meeting, with expectations for as much as a one-point reduction by the end of 2024.
Globally, the outlook remains bleak. The yen's strength and the Nikkei's decline signal deeper concerns about global economic growth, and both European and Asian markets have followed suit with declines this week. Bitcoin's continued slide toward recent lows further illustrates the retreat from riskier assets, as investors brace for more volatility.
Volatility surged this week, with the CBOE Volatility Index (VIX) jumping above 20, signaling growing market unease. Bears have taken the upper hand, with mounting concerns of a hard landing fueled by slowing job growth, rising wage inflation, and weakening manufacturing data. While there are still high hopes for interest rate cuts by year-end, the risk of a prolonged correction remains elevated.
Next week will be critical, with key inflation reports on the horizon, including the Consumer Price Index (CPI), Producer Price Index (PPI), and import prices. Additionally, earnings from major companies like Oracle, Adobe, GameStop, and Lennar will be closely monitored for signs of market direction.
For now, caution is essential. The current correction appears far from over, and with volatility on the rise, it would be wise to avoid chasing short-term rebounds. A market-neutral stance seems prudent as downside risks continue to outweigh the potential upside. The hard-landing narrative is gaining traction, and patience will be crucial in navigating the uncertainty ahead.
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SECTOR SPOTLIGHT
In a market that continues to feel the weight of volatility and economic uncertainty, certain sectors are beginning to show signs of stress. The broader indices have pulled back significantly, and while some investors are hunting for bargains, others are looking for safer plays amid the downturn. As major support levels across multiple asset classes are being tested, it's crucial to keep a close eye on sectors that may be particularly vulnerable or poised for continued weakness.
This week, the focus shifts to an area that could benefit from the current risk-off sentiment. With tech stocks, particularly the heavyweights in the Nasdaq, under pressure, one tool that traders may consider is positioning within a sector that profits from falling tech prices. Enter PSQ, an inverse ETF designed to move in the opposite direction of the Nasdaq 100. PSQ offers a way to hedge against further declines in technology stocks, and given the current landscape, it may be a prudent choice as volatility climbs and concerns about the Federal Reserve’s next steps grow.
TRADE OF THE WEEK
This week's pick is PSQ (ProShares Short QQQ), an inverse ETF that seeks to deliver the opposite of the daily performance of the Nasdaq 100. With the Nasdaq down 5.5% this week, the timing is right for those looking to hedge their portfolios. As detailed in the "Current Trading Landscape" section, the tech-heavy QQQ has dropped below its 50-day moving average, signaling that the selling pressure is far from over. Weak labor data, wage inflation, and weaker-than-expected economic reports have reinforced the hard-landing narrative, and while some investors are betting on interest rate cuts, the market's immediate path remains highly uncertain.
PSQ allows investors to profit from further weakness in the Nasdaq 100 without directly shorting individual stocks. This ETF is designed for short-term trading and works particularly well when market conditions are volatile, as they are now. The CBOE Volatility Index (VIX) has spiked above 20, and the sentiment across global markets is risk-averse. With key support levels being tested across multiple indices and tech stocks facing headwinds, PSQ is positioned to perform well in the near term.
My A.I. models have flagged PSQ as a strong candidate for the week, identifying growing momentum in the short space. The models are tracking key resistance and support levels across the Nasdaq, and with no clear catalyst for a rebound, PSQ offers a solid hedge against further downside in the tech sector. By incorporating PSQ into your strategy, you can mitigate risk and potentially capitalize on the continued market turbulence.
In this volatile environment, hedging with PSQ could offer some much-needed protection as the market correction unfolds. Stay cautious, avoid chasing rebounds, and consider positioning defensively with this inverse ETF as a way to navigate the uncertainty.
This week, I’ll be adding ProShares Short QQQ (PSQ) to my portfolio!
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Wishing you a week filled with resilience, growth, and prosperous opportunities!