This week, the latest Federal Open Market Committee took place and saw the Feds hike rates by a quarter percentage point, as well as discuss the latest bank turmoil. With all eyes on the Fed and its response to the banking situation, markets opened the week with a slight boost, only to falter in the second half of the week following Fed comments. Although the Fed stressed support and reassurance for the current dilemma, markets responded poorly and sold off.
The response, although not surprising, reminded me of the cognitive dissonance discussed in Malcolm Gladwell's book "Talking to Strangers," which I discussed in last week's issue of Power Trading and Markets newsletter. The book has been on my mind since we reviewed it in my book club, and each day I seem to find more tie-ins with my day-to-day life, whether it be personal or financial.
Talking to Strangers is a fascinating book that explores how social trends that focus on human interaction shape and shift our worldviews, as well as have grander real-world implications. In one of the sections, the author, Malcolm Gladwell, delves into brain physiology and how it is impacted by alcohol, which can lead to blackouts and even rape resulting in the destruction of both parties involved.
The book makes a powerful case for why we need to continue educating both young men and women on the possible consequences of binge drinking on college campuses. The definition of consent is essential, and both male and female students have a lot to risk if they do not establish clear boundaries in physical relationships. The consequences of such actions can be severe and life-altering, with women suffering from PTSD, physical and mental pain, and men facing possible jail time and the requirement to register as sex offenders for the rest of their lives.
As a father of teenage daughters, I was particularly struck by Gladwell's insights. Recently, my oldest daughter attended a high-school party where the police got involved. All of her friends left her alone and she was understandably upset. Her experience drove home one of the key points of the book: never attend these parties alone, never leave the parties alone, and if you do decide to drink, make sure to eat, drink water, and pace yourself.
I discussed this with her and offered what wisdom I could, hoping she would find it useful and always feel comfortable talking to me about these kinds of things. It is essential to have open dialogue, education, and empathy for different points of view in order to help young people navigate these situations.
What surprised me the most about this book is how it resonates with the financial world. As a trader, I know that it's crucial to avoid making decisions based on emotions. It requires an understanding of human brain physiology, as studies have shown that if your portfolio drops by more than 20% at any given moment, your frontal cortex responsible for cognitive decisions temporarily slows down, leading to the hypothalamus and the amygdala triggering a fight or flight response.
This physiological reaction is similar to binge drinking, wherein successive high levels of alcohol cause one's frontal cortex to shut down, leading to a blackout. In the financial world, this can lead to emotional blackouts that cause traders to cease trading forever. Although it may not be of the same intensity as something as serious as rape, it follows the same pathway.
The bottom line is that by sizing trades appropriately and actively managing the positions and position sizes. Traders can avoid a 20% drop in their portfolios and the fight-or-flight response. Similarly, spacing out drinks can help avoid blackouts. Gladwell's book highlights the importance of educating ourselves and our children about the dangers of making decisions without understanding the physiological reactions at play; it is a lesson that can be applied to both personal and financial decisions.
Conversations like these are what we strive for in our weekly webinars. Connecting the fundamentals of technical analysis with current market conditions and additional insights is what sets YellowTunnel apart from the rest. Not only do I bring a personal touch, combined with top-of-the-line A.I., but also key psychological pillars.
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For more information on the YellowTunnel tools and our trading community, I suggest reviewing our latest Strategy Roundtable, which we hold weekly on YellowTunnel. I also recommend checking out our latest Roundtable webinar in its entirety below:
With the unpredictable nature of the market and the uncertainty ahead of us, I can’t emphasize enough how vital it is for our readers and members of the Yellow Tunnel community to keep referring to our Live Trading Room so as to maintain a close tie of how our I and my AI platform is navigating us in and out of select trades. It’s FREE and I highly encourage everyone to sign up to the Live Trading Room and keep checking in throughout the trading day.
Every Monday and Wednesday, I highlight our best strategies and potential trading setups via the DISCORD server. It’s the future of bringing together a trading community’s total services, educational products, live chat venues, support, news, how-to tutorials, webinars, live-trading demonstrations, and tons of market analysis. It is incredibly interactive and full of crucial and timely information. Just go to:
I also want to emphasize to traders how vital a stop-loss discipline is to winning and being successful in an unforgiving market. We employ specific stop-loss instructions with every trade. The buy and sell programs controlled by high-frequency related algorithms can create great profits or cause sudden losses, so it is imperative to maintain an element of controlling risk with each trade.
CURRENT TRADING LANDSCAPE
As another volatile week comes to a close, traders remain concerned about the fragility of banks, the outlook for interest rates, and the follow-up reaction to the latest Fed moves. Despite selling off during the second half of the week, stocks are on track to end with slight gains.
The spotlight remains on banks, with Germany's Deutsche Bank shares tumbling 7% on Friday. The cost of insuring the bank against default has spiked, adding to worries about the health of banks. This comes after the collapse of Silicon Valley Bank and Credit Suisse earlier this month.
The Federal Reserve's quarter-point rate hike on Wednesday, which was intended to minimize inflation risks as well as bank turmoil, caused all three major U.S. indices to swiftly sell off and close down 1.6%. The higher rates have caused banks to record big, though unrealized, losses on asset portfolios, causing confidence in the sector to shake and ushering in the largest bank collapse since the 2008-09 financial crisis.
The Federal Reserve and other central banks have extended their US dollar swap line arrangements in an attempt to boost liquidity across global funding markets. The recent turmoil in the banking sector has left investors focused on the implications of the Fed's monetary policy.
Chairman Jerome Powell acknowledged the turmoil in the U.S. banking sector, stating that the issues were limited to a few banks and that the broader financial system was "sound and resilient." However, both Powell and Yellen stopped short of guaranteeing that all depositors would be saved in the event of further bank failures, causing a dip in the stock market.
The state of inflation and the health of the U.S. economy continues to be a concern for investors, as the expectations about the future of interest rates remain uncertain. Treasury Secretary Janet Yellen will hold a previously unscheduled meeting on Friday of the Financial Stability Oversight Council amid efforts to calm fears about banks.
Apart from the FOMC announcement, this week featured a few key reports. Manufacturing activity is shrinking at a slower rate than it was in February, according to the Preliminary U.S. Manufacturing Purchasing Managers Index, produced by IHS Markit. The index was 49.3 in March, up from 47.3 in February. Economists were projecting a reading of 47.2.
The current state of the market has caused widespread concern among investors, with liquidity issues in credit markets and a run on banks contributing to a lack of liquidity in treasuries. This has led to a widening of spreads across different credit structures, historical moves in the 2-year treasury, and concerns about a recession. The Fed futures are pointing to a 100 basis-point rate drop by the end of the year, and the Fed is expected to pause sooner than was initially expected.
Jerome Powell's speech and the 0.25% rate hike have brought attention to regional banks and liquidity issues, and the European Central Bank has noted that "not much progress has been made on inflation." The CPI from England (February data) continues to rise, raising concerns about inflation. The narrative is changing from a soft landing to a hard landing, with standard correlations between the Treasury market and equity market now present.
Credit liquidity remains the major theme for markets this week, with the 10-year yield breaking below its December lows. Investors are contemplating whether to keep their money in market funds with no risk or in equities with the risk of a 20-30% pullback. The recent disconnect between the bond, currency, and equity markets has raised concerns, and it remains to be seen if the equity market will follow the precipitous drop in the two-year yield or if the two-year yield will follow the resilient stock market.
China and Russia have made little or no progress toward a peaceful resolution of the war in their historic meeting this week. China has vowed to increase imports/exports between the two countries and continue to finance the war in Ukraine.
Given the current market conditions, I recommend hedging positions and keeping a close eye on earnings reports from companies such as Nike and Chewy, as well as liquidity issues in regional and global banks, and the response to the Federal Reserve's decision to influence markets.
The VIX is currently trading near $22, while support for the SPY is at $392, followed by $384; overhead resistance levels are at $402 and $408. See $SPY Seasonal Chart:
Despite the recent developments, it is still possible that the market will trade sideways for the next two to eight weeks. However, exercising caution and seeking professional advice before making any major investment decisions is crucial in these uncertain times.
Overall, traders continue to be risk-averse as bank worries take on a more global focus. The uncertainty surrounding the health of banks and the future of interest rates continues to be a significant concern for investors. With these conditions in mind, I have identified a sector and symbol that I will be engaging within the coming weeks.
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In today's uncertain economic climate, investors are turning to any safe haven they can find. Gold has been a symbol of wealth and prosperity for centuries, and its value has continually grown. During the latest economic downturn, with banks facing added pressure, gold has gained market-wide interest. While some symbols are prospering, others are still finding their footing. This week, I have identified one such symbol that I believe has impressive potential for growth.
SPDR Gold Shares (GLD) is a gold-backed exchange-traded fund that provides investors with exposure to physical bullion gold. The fund was created in 2004 by State Street Global Advisors, a subsidiary of State Street Corporation - one of the largest asset management companies in the world. Since its inception, GLD has become one of the most popular and widely traded ETFs in the world, offering investors an easy way to invest in gold.
GLD's objective is to track the price of gold, net of expenses, and the ETF holds physical gold bars in secure vaults in London, New York, and Toronto. Each share of GLD represents a fractional ownership of the gold held in the vaults, and the value of each share is based on the current market price of gold. As of March 2023, GLD holds over 38 million ounces of gold, with a total value exceeding $80 billion.
The price of gold has historically been influenced by global economic conditions, political events, and currency fluctuations. In recent years, gold has demonstrated its resilience and ability to hold its value during times of economic uncertainty, and many experts believe that the precious metal has a bright future ahead. With its growing popularity and the continued demand for gold, GLD may present a golden opportunity for investors who are seeking a safe-haven asset in uncertain times. Let us review our A.I. data.
Looking at GLD's 10-day forecast, we see several encouraging signals. Firstly, the symbol sports a model grade of "B," indicating it is in the top 25% of accuracy within our data universe. Secondly, the symbol is showing a positive vector score and a 10-day trend that is one-directional and consistently going towards the positive side. With its current price and this forecast, I have faith in GLD's performance during these uncertain times. See the $GLD 10-day forecast:
Additionally, when we review the Seasonal Chart for GLD, our long-term forecast tool, we see a great sign for the symbol. GLD shows all four-time ranges flashing toward the higher end and two of them show very high accuracy ratings for their forecasts. With the next 20, 30, 40, and 50-day time frames flashing higher, my confidence in GLD only grows stronger. See $GLD's 10-day forecast:
With these gold levels in mind, I have another play I will be keeping an eye on in the upcoming week.
TRADE OF THE WEEK - ALERT: Grab Gold Gains
Yamana Gold Inc. (AUY) is a Canadian-based gold producer with operations in Canada, Brazil, Chile, and Argentina. AUY is listed on both the Toronto and New York Stock Exchanges, with a market capitalization of over $6 billion as of March 2021, and has become one of the largest gold mining companies in the world.
AUY's primary business is the production and sale of gold and silver, with other by-products such as copper, zinc, and lead. The company has a diverse portfolio of mines, with its flagship operations being the Canadian Malartic mine in Quebec, the Chapada mine in Brazil, and the El Peñón mine in Chile. AUY has a proven track record of generating strong cash flows, with revenues of over $3 billion in 2021.
Despite its strong financials, there are several reasons why investors may consider shorting AUY. Firstly, gold prices have been significantly impacted by the volatility of recent years, and the demand for gold as a safe-haven asset has fluctuated. Secondly, AUY's production costs have been increasing, which has adversely affected its profitability. The company's all-in-sustaining costs (AISC) have increased by 11% over the past year, mainly due to higher labor costs, inflation, and increased capital expenditures. This has put pressure on the company's margins and earnings.
Thirdly, AUY's operations in Argentina have been facing several challenges, including political instability, labor disputes, and operational issues. This has resulted in production disruptions and higher costs, which have impacted the company's financial performance. Finally, AUY's stock price has been underperforming compared to its peers in the gold mining industry. The company's shares have declined by over 20% over the past year, while other gold mining companies have performed better. This may be an indication of weak investor sentiment toward AUY's prospects.
While AUY is a well-established gold mining company with a strong track record of generating cash flows, there are signs that point to the current time being a wise one to short-sell AUY. Similarly, some of our A.I. forecasts are showing similar reasons to short-sell AUY.
With a model grade of "B", AUY has a top 25% accuracy rating at the moment. Furthermore, AUY shows a negative vector score. The symbol has spiked over the past month and is currently near its 52-week high. See the 10-day $AUY forecast:
When looking at our Seasonal Chart, AUY is showing one signal towards the higher end but three that are flashing "LOWER" with a very high forecast and accuracy rating. Considering the latest levels of the market, the 10-day forecast, and the Seasonal Chart data, it appears that now is a great time to short AUY. See $AUY Seasonal Chart:
This week, I’ll be shorting $AUY in my portfolio!
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One more thing, I've had the opportunity to take additional action with a great organization supporting families in Ukraine directly. Gate.org is a foundation where fundraising is held for specific families, allocating funds to multiple families currently living in Ukraine. I am on the board of directors for this great initiative and encourage everyone to check it out and donate if possible. The war in Ukraine is escalating and families are being negatively impacted and displaced daily. To learn more about this initiative to help families, please see the link below:
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