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RoboStreet – June 17, 2021
Fed Policy Triggers Long Dollar Short Commodities Trade
The Fed emerged from their two-day FOMC meeting with a few changes in policy and their economic outlook. The Fed is going to continue their quantitative easing of $120 billion per month, consisting of $80 billion in Treasury securities and $40 billion in mortgage-backed securities. The Fed is also going to maintain their 0% interest rate policy through 2023, which has been pulled forward from 2024, moving up the date from which they plan to raise key short-term interest rates.
The Fed also raised their forecast for real GDP growth from 6.5% to 7.0%, and most importantly, raised their inflation forecast for 2021 from 2.4% to 3.4%. There has been a lot of commodity inflation this year in oil, copper, steel, aluminum, lumber, and most other hard and soft commodities. However, the first two weeks of June have seen many of these commodity prices move lower.
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
While commodity prices are still up for the quarter, and those companies engaged in commodity production will show great quarterly results, it looks as though commodity prices have peaked near term. So, when the inflation numbers come out for June and July, there should be some relief. The economy has experienced an inflation bubble, but it’s ebbing, validating the Fed’s position that current inflationary pressure is transitory.
The $SPY was down as much as 1% after the FOMC decision and continued to trade lower in the after-market futures session. The short-term support is at $420. The next level of support is at the 50 day moving average – $416. All sectors sold off today with the exception of the bank stocks.
The $DXY has broken through $90.60 resistance and I am waiting for confirmation of the breakout (1-2 days; bearish event for the markets). The $TLT continued to trade in the uptrend.
The $SPY short term support level is at $403-$410.The SPY overhead resistance is at $425. Even if the $SPY is able to trade above the $425 level, the market can only make incremental highs. I would consider rebalancing the portfolio at this point to be more market neutral.
I expect the second wave of the sell-off to restart as early as this week or next. Based on our models, the $SPY can pull back 10-15% from the all–time highs in the next 2-6 weeks. Based on our models, the market (SPY) will trade in the range between $388 and $425 for the next 2-4 weeks.
The latest posture by the Fed sets up an attractive long dollar/short commodity strategy in that the Fed is shortening its timeline on hiking rates while commodity prices stand to decline as supply lines are more normalized. There are various ways to play this out from an investment standpoint, which is what we do best with our RoboInvestor advisory service where our proprietary AI models identify the best money-making opportunities to act on in situations just like this one.
One place to consider profit potential in this environment is to go long with the Invesco DB US Dollar Index Bullish Fund ETF (UUP). After building a minor base and testing key intermediate-term technical support, shares of UUP popped higher by almost 1% after the Fed showed its hand of higher rates coming sooner than later. Our AI-driven Seasonal Chart is providing a “Higher” probability reading for the next 20 and 30-day periods, which could extend to 40 or 50 days if the short-term bullish momentum builds on itself. The important thing is that our AI platform is flashing buy signals.
Buying inverse commodity ETFs is also another way to seize on this opportunity or even put on what is called a “pair trade”, where we buy the dollar ETF and the inverse commodity ETF together, leveraging the strategy to optimize total return.
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And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
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