We got one of the biggest recent reports Wednesday as Consumer Price Index data was released. If you’ve been following along then you should know it’s the Federal Reserve’s favorite metric for gauging inflation… even though it’s a bad one to use.
And we’ll get to this in just a moment, but that data has given us the opportunity to make a top trade in a Financials stock on the back of inflation and earnings.
Source: Bloomberg
CPI data came in hot Wednesday morning, showing a 5.4% year-over-year increase, which is higher than expectations. But the most important thing to note…
It’s getting higher.
Source: Bloomberg
Which, if you’re paying any attention at all to the things that normally inflate — commodities — that trend should be as obvious to you as it is to me.
I mean just look at all that green!
Source: Bloomberg
Maybe less obvious, however, is that despite half of these commodities being up huge Wednesday morning, interest rates are falling — even though they typically rise along with commodities.
Source: Bloomberg
Want to know why? The answer is simple…
Interest rates were super high Tuesday, and now they’re not. So technically… they’re falling.
This scenario of rising inflation and “falling” rates has gifted us a huge opportunity in a top Financials trade… straight from our weekly watchlist.
And it’s trading at a discount…
The Top Financials Stock Trade for Free
JPMorgan Chase & CO. (NYSE: JPM) kicked off earnings season with an absolute bang. The Financials sector giant crushed it with record revenues in investment banking, wealth management and commercial banking.
Source: Bloomberg
Prior to the open, the mainstream financial media agreed with us for once, saying that JPM “exceeded profit expectations.” Sounds great, right?
Not long after, it sold off. At the open, the entire sector tanked, which prompted a headline switch to “record quarter overshadowed by muted loan growth.”
Source: Bloomberg
The message here from these journalists is erratic, to say the least. There are six separate headlines here talking about inflation, which is clearly rising, as I pointed out above. Yet one says “Stocks Drop, Bonds Climb.”
I’m at a loss for words… not really. But that’s not how this works. That’s not how any of this works!
Also notice they call out energy inflation… but more on that later.
When inflation rises, interest rates do, too. I’ll show you:
Source: Bloomberg
The white line (CPI) and the blue line (10-Year U.S. Treasury interest rate) are damn near identical — down to the dip in August and the rise in September.
When interest rates rise, bonds FALL. Here’s the iShares 20-Plus Year Treasury Bond ETF (NYSEArca: TLT) in white versus interest rates — again in blue:
Source: Bloomberg
When one goes up, the other goes down… when trading Financials, I call that easy money.
Now let’s overlay JPM share prices on interest rates.
Source: Bloomberg
You see where I’m headed? JPMorgan is pulling back because interest rates are, too. Bank stocks ran up big time into earnings season, and now everyone is taking profits.
If you’ve ever wondered exactly what “buy the rumor, sell the news” looks like, here you go.
How to Make These Free Trades
This is a great opportunity to buy the dip in one of the strongest stocks on the market on a big-time red day. That’s why I keep saying this is one of the top Financials stocks to trade right now.
If you want to get cute, you can divide an entry into three legs and pick up a third of any position, set a limit order for another third at the 50-day moving average of $160.44, and the final third at the 50% retracement of its recent move — around $158.61.
Source: Bloomberg
You can YOLO if you want, I suppose, and buy it all — it’s only a 2% downside from here — but with options expiry coming up on Friday, I prefer caution.
Tie Back to Energy
Lastly, I want to make note of the Energy sector, as a big topic of ours lately has been the Energy Crisis.
If you were paying attention Wednesday morning, we got big pullbacks in our long natural gas and coal plays — UNG, CEIX and BTU.
Source: Bloomberg
And again, if you were paying attention, you picked some up. Remember: Leg in a tenth of a position or less at a time.
And if you didn’t, then watch the market open Thursday or Friday.
If we get any turbulence whatsoever from options expiry, that could provide another opening. I’m more than happy to keep picking these up on red days, and I’ll try to keep reminding you.
If you’re feeling a little funky, and because I’m the best, I’ve got an extra free trade for you. Take a look:
Source: Bloomberg
What you see there is a higher low in gold prices.
Remember that I put this on our short list because gold hates rising interest rates.
Source: Seawolf Research
See how they move in opposite directions? It wouldn’t be the craziest idea to start establishing a short position on the yellow metal.
And if you aren’t allowed to short in your account, you can always use the ProShares UltraShort Gold ETF (NYSEArca: GLL) which made a big lower high Wednesday.
Source: Bloomberg
I’ll be back Thursday with a deep dive into this CPI data, until then, let’s get after this top Financials stock to trade and remember…
Buy on red, sell on green.
All the best,
Matt Warder
Fortune Research
