How we think through data… One big commodities winner over the summer… And one big loser… No rate cuts today, and maybe not until November… But the seasonal trend in Treasury yields is down anyway… One income expert's gameplan for trading the Age of Chaos…
By Michael Salvatore, Editor, TradeSmith Daily
Our superpower at TradeSmith is our ability to put data into context.
So many market commentators simply put unusual data points out into the ether, leaving followers grasping for an actionable takeaway.
We, on the other hand, take it a step further... and uncover what these unusual signs actually mean.
Here's the perfect example...
Over the weekend, we spotted a social media post going around pointing out that while the S&P 500 is at a new all-time high, less than 4% of the stocks within it are at 52-week highs. I've recreated the chart below:
Right now, just 17 S&P 500 companies are at new 52-week highs. That's down from over 100 back in March... a breadth downswing of nearly 85%.
This sounds pretty bad. We've observed before that the stock market generals are charging into battle all their own. And with parabolic gains in Nvidia (NVDA), it doesn't take much to see where this is coming from.
But again, we shouldn't take a scary-looking chart at face value. We should instead look through history to see if we should actually be scared of it.
And believe it or not, what we're seeing in the chart above is a reason to cheer, not fear.
This low in 52-week highs has happened 23 times since 1999. Assuming you bought the S&P 500 on this signal, 21 days later, SPX is up 61% of the time. Average win is 2%; average loss is 1.8%. In other words, nothing better than what you'd get from random data. And six months out, the result is the same.
At one year, we are higher 80% of the time with an average win of 9.4% and an average loss of 1%. The chart below shows the last ten years, with green bars showing previous instances.
So there you have it... If you're worried about low participation in the recent highs, you have little historical reason for it.
Could things be different this time? Of course. But history is on your side.
Keep the insight above in mind. It could save you from knee-jerk reactions to seeing data points like these without context.
It doesn't matter if you're the techiest of high-tech companies like Tesla or more of a low-tech, legacy-staples business like Procter & Gamble. You're nothing without materials.
If you're in tech, you need lots of different metals and miners to make the semiconductors that power your products. We all know that.
But the impact of commodity markets goes far beyond metals. Corn, soybeans, and cattle are core to our food supply. Oil and natural gas keep the lights on.
In one way or another, the cost of material commodities trickles through the entire economy.
With that in mind, let's see which commodities are best poised to profit over the next few months...
I ran a scan looking at the last 25 years, and during that time, the next three months have been a terrible time to own most commodities. On the list of 23 commodities futures I curated, only seven of them show a profitable pattern over the next 63 trading days (or 12 calendar weeks).
Of these, only two show patterns with a win rate of over 60%. (With the other five commodities, you're looking at coin-flip odds... or one or two big winning years skewing the data.)
The highest win rate is in feeder cattle, with the asset up more than 66% of the time for an average return of 3.3%.
Trailing it is gold, with a win rate of 62% and an average return of 7.3%.
Of these two, gold has the better historical return and is easier to trade, for example, by buying call options on the VanEck Gold Miners ETF (GDX). History puts nice odds on that trade going out to September.
But as I said, there's a lot to talk about on the downside.
The worst asset to own over the summer is natural gas, which falls more than 72% of the time over the next three months for an average loss of over 13%. Close behind are corn and soybeans, with similarly high loss rates, though at least the losses are much smaller: 3.3% and 2.6%, respectively.
If you're looking to trade the downside, put options on the U.S. Natural Gas Fund (UNG) are one place to look.
❖ Now, let's turn to today's focal point...
The Federal Open Market Committee meeting concludes today, with Federal Reserve Chair Jerome Powell set to give his remarks and press conference at 2 p.m. Eastern.
Also, a few minutes after this edition of TradeSmith Daily hits your inbox, the Consumer Price Index numbers for May will be out.
I highly doubt a cool inflation print this morning will change anyone's mind at the Fed. And going into today's meeting, the FedWatch tool gave effectively zero chance of a rate hike in June – which should surprise nobody.
If the odds are anything to go by, we won't see a rate cut until this November. That's the first date that a 25-basis-point cut has the overwhelming majority of likelihood:
The one noteworthy thing is how the Fed is not leading the rate-cut campaign. Canada, Europe, and Britain have all cut rates ahead of the Fed's first move – and they traditionally follow in their footsteps.
This tells us two things:
Other major economies are in more dire need of rate cuts, so much so that they're not willing to wait on the typical ringleader.
The U.S. economy is, conversely, in less urgent need of rate cuts – at least in a broad sense.
But another factor in all this is the seasonal nature of Treasury bonds. Take a look at this TradeSmith seasonality chart of the iShares 20+ Year Treasury ETF (TLT):
From June 11 – the day I'm writing this – to the end of August, Treasurys have historically returned 3.8% over the last 22 years. That's with an accuracy rate of almost 81%.
The summertime months, being generally regarded as months of poor returns for stocks, seem to be a time of solid returns in long-term Treasurys.
But remember – when Treasury prices rise, yields drop. If we see a rise of 3.8% in the price of 20-Year Treasurys, that would correspond to a drop in yield from 4.675%, where they stand today, to under 4.5%. That's a de facto interest-rate cut of 175 basis points.
This summer could see stocks and bonds rallying together, as seasonal pressures work in tandem to produce a great forward return.
The takeaway here, as we've been saying, is to simply not bow out of the market during these next few crucial months. Stocks have already defied the "sell in May" trend by posting new highs... and there's little reason to think that will change.
The same chart I saw right before $5 trillion vanished from stocks back in 2000.
So, if you want to save your retirement account from being sliced in HALF... but you also want the shot to grow your retirement account 10-fold, then it's time to prepare
❖ Every day is an income opportunity in the Age of Chaos...
Charles Sizemore, Chief Investment Strategist at our corporate partner The Freeport Society, thinks the old way of generating income might not be enough for what's coming.
Take a look at your dividend portfolio. It might look great today... but would it look great if the market took a dive? Or if several of your dividend-payers suspended their payouts to wait out an economic storm?
Don't get me wrong, dividends are an important part of every portfolio. But they're not bulletproof.
If you really want to ensure you're earning enough, you have to be proactive.
And that's where Charles comes in.
With his strategy, you can earn income whether the market experiences sunny skies, a bit of rain, or a hailstorm.
And you don't have to wait around for the next dividend payment from stocks like Coca-Cola.
For the last 100-plus years, Coke has been an icon for income investors, no doubt. But as more and more investors deploy strategies like the one Charles Sizemore briefs you on here, the shift could spell disaster for old-school dividend stocks.
Charles calls it the C.H.A.O.S. Cash System.
And while most investors are buying Coke or McDonald's and settling for 2% to 3% yields... thanks to a proprietary quantitative strategy — Charles targets a group of stocks 99% of income investors ignore that allows him to make more money with less risk.
