How Bad is Inflation?


Inflation is on the rise and it’s a real concern for consumers and investors. To help readers assess and navigate the inflationary environment I am publishing excerpts of recent Profit Radar Reports below:

Barron’s rates iSPYETF a “trader with a good track record,” and Investor’s Business Daily writes “Simon says and the market is playing along.”

Excerpt from the August 22, 2021 Profit Radar Report:

The June 6, 2021 Profit Radar Report talked about inflation and stated the following: 

From a contrarian perspective, when a trend becomes too popular, it’s usually nearing its end. However, unlike any other class, inflation can turn into a movement and instead of reversing it could turn into a self-fulfilling prophecy. How so? If the fear of inflation becomes engrained enough for consumers to buy items today because they fear it will cost more tomorrow, the cost of goods will rise regardless or despite of supply and demand forces.

I don’t think we are there yet and we may see inflation stabilize for a while. Nevertheless, inflation will likely become more of an influence for our recommended trades. In times past, when cash was king, we were more content sitting out a trade knowing the purchasing power of cash will remain stable. Moving forward, more research will be devoted to identifying sectors and commodities more likely to prosper in an inflationary environment.”

Since the above assessment, the CPI’s 12-month rate of change (ROC) increased from 4.2% to 5.3% but Google searches from inflation dropped 43%. At this point it doesn’t seem like consumers’ fear of inflation is pronounced enough to turn it into a self-fulfilling movement.

Commodities in general, one of the better inflation hedges, haven’t moved any higher over the last couple months. 

DBC (Invesco Commodity ETF) dropped 8.7% from its high, but is at support while over-sold. 

DBA (Invesco Agriculture ETF) was unable to break higher, pulled back, and is also near support while almost over-sold.

This is a short-term inflection zone for DBC and DBA. We’d like to ultimately see a deeper pullback (possibly after a bounce).

Excerpt from the August 18, 2021 Profit Radar Report

EWZ (iShares MSCI Brazil ETF) failed to close the open chart gap (dashed purple line) at 42.09 by a few tics and has since dropped some 15% and sliced through the rising support trend line. By many measures (in addition to RSI-2), EWZ is oversold. 

About 25% of Brazilian stocks are in the materials sector, as such EWZ is a partial commodity play, and as mentioned in the June 6, 2021 Profit Radar Report, commodities are historically one of the best inflation hedges. Short-term, EWZ would have to move back above resistance or meet the next support around 34 for a lower risk entry.

Continuous updates are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. 

Follow Simon on Twitter @iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.

The Best Trade of the Year

We’ve had a number of good trades in 2016. In fact, only 1 of 7 trades was closed in the red.

It’s tempting to label our S&P 500 trade (bought at 1,828, sold at 2,040) the best trade of 2016 (thus far).

Barron’s rates the iSPYETF as a “trader with a good track record.” Click here for Barron’s assessment of the Profit Radar Report.

True, the S&P 500 trade was the most contrarian trade of them all. It required a fair amount of moxie to go against the crowd.

But the best trade was a rare ‘high probability trade.’

The March 6 Profit Radar Report observed the following setup:

Natural gas futures fell to a multi-decade low ($1.611 per one million British Thermal Units – BTU).Sentiment is very bearish (bullish for gas) and seasonality is turning bullish. Trade is at or near support and there is a bullish divergence on the daily chart. This is shaping up for a rare high probability trade. We are looking for a low-risk entry point.”

The monthly bar chart shows a birds eye view of the setup.

The daily chart shows a bullish RSI divergence and the touch of double support.

Natural gas seasonality turned bullish in early March.

Some measures of investor sentiment were at or near bearish (bullish for gas) extremes.

Technicals, sentiment, and seasonality all pointed in the same direction (up). The pieces for a high probability buy signal were in place.

We bought on March 10, after trade poked above the initial red resistance line. We sold on March 30, when trade was overbought and against resistance.

The profit was about 14% for natural gas futures and about 9% for the related ETF (UNG) trade (corresponding commodity ETF returns tend to be lower due to contango).

Based on seasonality, there is more up side for natural gas, but the probability of further gains is not as high as it was in early March.

The Profit Radar Report is always on the prowl for rare high probability trades.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Key Commodity Index at Major Inflection Point May Provide Clues for Oil

As MVP of the commodity sector, oil is usually in the spotlight (especially after a dizzying 60% drop) while most of the other commodities operate in the shadow.

The Reuters/Jefferies CRB Commodity Index, the Granddaddy of broad commodity indexes, sports an interesting chart right now.

The index has reached the lower end of a trend channel that’s defined a multi-year down trend.

Is that a buying opportunity? Is oil near a low?

First we should look at the composition of the Reuters/Jefferies CRB Commodity Index.

In 2005, the index was revised from an equal weighted to a 4-tiered grouping system, designed to reflect the significance of each commodity. Here is the group weighting:

  • Agriculture: 41%
  • Energy: 39%
  • Base/Industrial metals: 13%
  • Precious metals: 7%

Crude oil makes up 23%. The next biggest components are gold, natural gas, corn, soybeans, aluminum, copper and live cattle with 6% each. Silver accounts for only 1%.

Since oil is the heavy weight of the Reuters/Jefferies CRB Commodity Index, trend channel support should be watched carefully for anyone fishing for an oil bottom.

Under normal circumstances this would be a low-risk opportunity to buy the Reuters/Jefferies CRB Commodity Index (trend channel could be used to manage risk).

However, there is no Reuters/Jefferies CRB Commodity ETF.

Broad based commodity ETFs include the PowerShares DB Commodity Tracking ETF (NYSEArca: DBC) and iShares GSCI Commodity ETN (NYSEArca: GSG).

DBC has a strong correlation to the Reuters/Jefferies CRB Commodity Index, but the actual chart paints a different story.

DBC already dropped below trend channel support and is near its all-time low. Aside from a Fibonacci projection level at 14.13, there is no technical chart support.

This makes it hard to manage risk effectively. Traders looking to bottom pick should probably use the Reuters/Jefferies CRB Commodity Index trend channel as stop-loss for any long positions. Oil ETFs include the United States Oil ETF (NYSEArca: USO) and iPath Oil ETN (NYSEArca: OIL).

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Diversification: The Correlation Risk Trap is Real

A rising tide lifts all boats and liquidity buoys all asset classes. That’s great, but it’s not diversification. In fact, it presents a whole new type of hidden risk. Many ‘diversified’ portfolios today would fail miserably at any sort of Black Swan event.

The purpose of diversification is to reduce risk. The rationale behind diversification used to be that booming cycles of some asset classes offset the bust cycle of other assets.

Diversification made sense in an environment where some asset classes boomed while others got busted, but that isn’t the case anymore.

Today most asset classes ebb and flow at the same time, but at different degrees. This makes diversification less effective and possibly dangerous.

The first chart shows the percentage change of the following asset classes/ETFs since January 2007: S&P 500 SPDR (SPY), iShares Core Total US Bond ETF (AGG), iShares Dow Jones US Real Estate ETF (IYR), and iShares S&P GSCI Commodity ETF (GSG).

In early 2007 stocks and commodities cushioned the decline in real estate prices. In 2008 commodities lessened the sting of falling stock and real estate prices.

Then came quantitative easing and it’s become clear ever since that all asset classes swim in the same liquidity pool. Some swim faster, some slower, but all float with the tide.

Different Approach to Diversification

A less popular, more contrarian and quite possibly more effective approach to diversification involves simple under appreciated cash.

Based on Rydex funds flow data, investors are despising cash like never before. Low interest rates are partially to blame for the great cash exodus, but excessive enthusiasm for stocks is probably the main motivation.

The second chart illustrates basic support (green) and resistance (red) ranges for the S&P 500. The S&P tends to get overbought in the red and oversold in the green zone.

Over the past years, investors did well to diversify out of stocks (and other assets) into cash when prices reached the red resistance range and rotate out of cash into stocks (and other assets) in the green range.

The S&P is about to reach overbought territory and risk is rising. Raising cash may offer more risk protection than diversification.

The Profit Radar Report will provide specific trigger levels indicative of a trend change from up to down.

Oil Flash Crash Erases 3.8% in 4 Minutes – Is This a Sell Signal?

Wall Street traders returning from lunch saw one of the most pronounced mini flash crashes in history. Within a matter of 4 minutes (between 1:51 –  1:54 pm EST) crude oil prices dropped 3.9%. The day’s trading range was 4.9%.

The swings were equally dramatic in oil related ETFs like the United States Oil ETF (USO) and iPath S&P GSCI Crude Oil ETN (OIL). The ripple effects were also felt in the broader PowerShares DB Commodity Index ETF (DBC) and iShares S&P GSCI Commodity Index ETF (GSG).

What caused this mini flash crash and is this a sell signal for oil?

What Caused the Sudden Drop?

Traders, analysts and regulators are still fishing for reasons, but there are only speculations thus far. An incorrectly entered trade (“fat finger error”) or rumors of a possible release of oil by the United States strategic reserves are possible suspects.

Is this A sell Signal?

Oil is not one of the asset classes regularly covered by the Profit Radar Report, but we can apply the same technical analysis methods used for the S&P 500, gold, silver, currency and Treasuries to oil.

The chart below plots crude oil futures prices against the 20 and 200-day moving average, prior support/resistance levels and a largely unknown but effective indicator called percentR.

We see that Monday’s quick dip pulled oil prices briefly below the 20 and 200-day SMA, which converged at around 96.50. Prices found support at 95 (green line), which is an area that buoyed oil prices several times before.

In addition, Monday’s drop triggered a bullish percentR low-risk entry. Only a close below 94.65 would negate the bullish low-risk entry.

Obviously, most asset classes are overbought due to last week’s Federal Reserve induced price pop and due for a correction. However, as long as oil prices stay above support at 94.65 – 95 any correction will have to wait.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.