There’s no sugar-coating it… The stock market is being hit hard by major catalysts from all sides. The first one — the omicron variant — hit on Thanksgiving while everyone was enjoying their second dessert…
And the next catalyst to bomb the market hit when the Federal Reserve announced its decision to taper more aggressively than originally planned next month. However, I saw this move coming from a mile away — you can’t ignore inflation for over a year and expect it to just disappear.
So what’s a trader to do when presented with money flowing in and out of stocks at an alarming rate? You turn to pairs trades for inflation and profit from both the weakest and strongest stocks!
And the first thing you need to do in order for this to work is figure out where the money is flowing…
The Best Pairs Trades for Inflation
For example, we just saw Docusign Inc. (Nasdaq: DOCU) crater almost 50% in a single day. The company missed earnings estimates by about $25 million — setting off a $25 billion haircut for the stock.
And DOCU is a good, reputable company that could do wonders for investors long term. It’s not just some weak mom-and-pop stock…
So what does that tell you? It tells me there’s a lot of air in growth and high price-to-earnings ratio tech stocks.
And when air — i.e. money — starts coming out of stocks in such a way, it also tells me we’re in a different trading regime entirely. Two years ago, we would have never seen a 50% fall in a reputable stock within 24 hours…
But that’s what happens when inflation is running rampant in the market.
One of the places I love to look at — and go long on — when money is coming out of technology is the Russell 2000. Right now, about 36% of Russell 2000 stocks are trading above their 50-day moving average.
In fact, I just had a great pairs trade for inflation — going long the Russell and short in ARK Innovation ETF (NYSEArca: ARKK) — that gave me incredible gains.
If you’re not a member of my Money Link strategy, then you’re missing out! The timing in our recent Nov. 8 ARKK trade was an absolute dream come true for any trader.
The puts we bought made over a 500% gain! And now the stock is in a good spot to short again…
The base case for why the growth stocks in ARKK collapsed this past week remains the same. I expect interest rate shocks on the upside in bond yields to cause another technology sell-off.
Check out my newest pairs trade here, and click here to get in on the next Money Link trade.
But that’s not the only pairs trade for inflation I have going on right now — I’m long a certain Japanese ETF and short an emerging markets ETF…
Watch the video below to learn more about the pairs trades for inflation I’m looking at right now.
And as always, send any trading questions to jeff@joyofthetrade.com and stay ahead of the markets, especially these choppy ones, by subscribing to our YouTube channel.
