We’re a week away from the fourth quarter of 2021, and we need to plan ahead. Earnings reports are on the horizon and I noticed something… interest rates are rising, which means something is changing.
So in this week’s free trade alert, we’re going to discuss how to play rising interest rates as an economic shift looms.
Google job search data has turned positive again — a precursor for employment increases — and we are clearly shaping up for at least a decent fall season in terms of consumer spending.
As government assistance runs out, the leisure industry has begun hiring en masse. Due to a workforce shortage, many of those establishments are hiring at higher wages than they were pre-pandemic.
We also appear to be on the other side of a spike in delta variant cases, so reopening should continue.
COVID-19 cases are rolling over, and Pfizer announced positive results for its version of the vaccine in children ages 5 to 11. It plans to ask the Federal Drug Administration for emergency approval by the end of the month.
What does that mean for us?
It means lower income workers are getting paid more as we head into Q4, and they should spend as such. Although, they might soon find that their new income doesn’t go as far as it once did as inflation-elevated prices stick.
In the short term, however, that — along with rising interest rates — means we could see a brief return to growth as we head toward the end of the year.
First, a Recap of Our Prior Trades
After Monday’s sell-off, it was good to see some positive action Wednesday. Volume was up on an up day for the market, which is a good sign that confirms said positive action.
Source: Bloomberg
And when we run our check on the other two Vs — starting with volatility — the “fear index,” or the VIX, went right back under 21 and closed there. Now remember, a score of 20 represents average volatility, which is a 1% move up or down on the day. Above 20 represent above-average volatility.
Source: Bloomberg
And the volatility of volatility? Right back below Friday’s levels.
Source: Bloomberg
So if you bought Monday’s dip in the Direxion Daily S&P 500 Bull 3X Shares (NYSEArca: SPXL) or the ProShares UltraPro QQQ (Nasdaq: TQQQ), you’re pretty close to even.
There are no major catalysts toward the month’s end and earnings season is just a few weeks away.
Trade Rising Interest Rates With This Stock
A big factor in how we close out the year will be everyone’s favorite holiday: Christmas.
The closer we get, the more the economy will accelerate as consumers begin buying presents for their loved ones.
One thing to note: Present buying may begin sooner rather than later this year. With the abundance of supply shortages, many consumers will look to get their shopping out of the way now before supplies are depleted.
I doubt this economic acceleration will last long, so whatever moves we get into in preparation for that, we should move out of before Q2 of 2022.
So when it comes to trading rising interest rates and all of these economic factors, I see a few areas that could face a short resurgence. I’m watching small caps, Consumer Discretionary and Financials…
And a couple of those were on Tuesday’s watchlist.
I want to focus on Consumer Discretionary right now, though. Because when earnings numbers start rolling in, we’ll see an outperformance in that sector — which is now showing positive one- and three-month momentum.
Source: Bloomberg
Which means the trade I want to highlight this week is the Consumer Discretionary Select SPDR Fund (NYSEArca: XLY).
Getting into the Consumer Discretionary sector early should be a huge benefit for us. And if you’re not sure, you can always leg in a little bit at a time, using a method from a prior bonus trade.
And then we hop out before the holiday shopping fizzles and the economy decelerates.
I’ll be back later this week with a recap and maybe even a bonus trade… So keep an eye on your inbox!
And as always, stay frosty, folks.
All the best,
Matt Warder
Fortune Research
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