Why You Need to Focus on Economic Indicators

by | Jan 22, 2019 | Bishop's Corner

The stock market is taking it on the chin this morning after a long weekend.

The catalyst?

The World Economic Forum, held in Davos, Switzerland, and running from January 22- 25.

Invited are heads and members of more than 100 governments, over 250 political leaders from the G20 and other countries, along with the top execs of the 1,000 foremost global companies.

They gather to discuss the outlook of the global economy.

President Trump has decided to skip this year’s meeting (as he’s still dealing with the government shutdown ). However, I’m still watching…  

After all, who doesn’t want to know what the global elite are thinking about the world economy?

You don’t have to be a conspiracy theorist to believe these individuals move markets. That said, I’m watching out for clues, and tiny bits of information that will give me a trading edge.

As you know, on Friday, I wrote to you about my concerns about the market. Mainly, volatility is getting relatively low again and (some) bad news is getting swept under the rug.

It just takes one catalyst to switch sentiment.

Was today’s comments out of the International Monetary Fund enough to push stocks lower for an extended period?

Changes in Macro-Economic Indicators

Now, here’s what’s changed with the market:

  1. The International Monetary Fund (IMF) lowered its global growth outlookThe International Monetary Fund (IMF) cut its forecast for world economic growth this year due to trade tensions and the potential for rising interest rates in the U.S. The IMF now expects global growth this year to come in at 3.5%, down from 3.7% in 2018 – cutting its 3.7% growth projections for 2019 back in October.

    Additionally, the IMF noted it would leave its prediction for U.S. growth this year unchanged at 2.5%. However, it trimmed 19 countries’ growth outlooks – specifically, those use the euro currency to 1.6% from 1.8%.

    IMF Managing Director Christine Lagarde noted the risk of an economic slowdown in global growth had increased and is urging policymakers to address government debt, and other economic vulnerabilities.

    That said, the Federal Open Market Committee (FOMC) will meet at the end of the month – outlining economic policies. Additionally, Fed President Jerome Powell will be speaking after the FOMC announcement, which should give us more clues as to which steps the Fed will take.

  1. China posted its slowest pace of Gross Domestic Product (GDP) growth in nearly three decades in 2018, due to the trade war with the U.S. China reported a 6.6% GDP growth rate for 2018 – the slowest annual pace that China has recorded since 1990.

  2. The CBOE Volatility Index (VIX) is still trading below 20 – indicating the market is relatively complacent.

    Check out the hourly chart of the VIX.

    That’s a long ways away from where it was trading just last month.

    Now, with these ongoing catalysts, the VIX could break above 20. In turn, panic may ensue, potentially causing another market selloff.

That in mind, you’re probably wondering, “How can I make money off of these market-wide catalysts?”

Well, I use specific technical indicators that let me know when to be bullish and bearish. That said, these patterns work in any market environment, especially when stocks are crashing.

Now, let’s look at some exchange-traded funds (ETFs) and one exchange-traded note (ETN) that could potentially help you make money from these catalysts.

iShares China Large-Cap ETF (FXI)

Here’s a look at FXI on the hourly chart.

FXI gapped down this morning due to the weak GDP growth rate. However, I’m not going to chase this ETF. I’ll be waiting for my pattern – as annotated above.

Moving on.

FXI provides exposure to large-cap Chinese stocks and allows traders to gain access to 50 of the largest ones. That said, when traders are trying to gain exposure to the Chinese market, they’ll often look to FXI. Keep in mind, this ETF tracks Chinese stocks that trade on the Hong Kong Stock Exchange.

That said, the next time there’s global economic news that could affect China, you might want to pull up this ETF and track it using the money pattern to spot shifts in trends.

iShares 20+ Year Treasury Bond ETF (TLT)


Whenever there is large economic news, I like to put TLT up on my radar. You see, these catalysts are known ahead of time, and it could give us clues as to where the market is headed.

The bond market is often a good barometer of what traders are thinking.

For example, here’s a look at TLT on the hourly chart.

When the stock market is weak, traders will often look to TLT to hedge their positions. You see, TLT is a flight of safety, and when market participants are expecting a weak market, they’ll start to buy this… which bids up the prices, causing gap ups as you see in the chart above.

That said, we have to be specific here. I’m waiting for the blue line to cross above the red line. However, I may get in earlier in anticipation of a strong move higher with the potential for heightened volatility.

Now, the iShares 20+ Year Treasury Bond ETF provides traders with exposure to long-term U.S. Treasury Bonds with maturities greater than 20 years. Before you go out and start trading TLT or TLT options, there’s one thing to understand about the ETF.

For example, when interest rates are lowered, TLT tends to benefit over the short term. However, over the long term, TLT would be relatively weak since the fund is investing capital at a lower interest rate. The opposite is true when interest rates rise. That said, interest rates and market sentiment will affect this ETF.

Last, but not least, this brings us to VXXB.

iPath Series B S&P 500 VIX Short-Term Futures ETN (VXXB)

Keep in mind, VXX will cease trading on January 30, 2019. In turn, traders will look to VXXB to gain exposure to the VIX.

Here’s a look at the hourly chart on VXXB.

I’m looking for the blue line to cross above the red line… if it does, I think it has upside to the green line (the 200 hourly simple moving average).

Before you consider trading VXXB, make sure you understand the product.

Now, VXXB is a vehicle that allows traders to gain exposure to the VIX. Keep in mind ETNs are like a combination of stocks and debt securities. That said, they are considered risky.

Additionally, VXXB offers exposure to a daily rolling long position in front and back month VIX futures contracts. Consequently, VXXB reflects market participants’ views of the future volatility over a 30-day period.

That in mind, if there are negative economic catalysts, we can see volatility spike, and if I’m long call options, it’s not rare to see me multiply my money when stocks are crashing.

At the end of the day, it pays to be patient and wait for confirmation. That said, one day doesn’t make a trend. However, with so much going on with earnings and in Davos, I’ll be monitoring the situation closely and informing you of the latest developments.

 

To YOUR Success! 

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Jeff Bishop

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