Monetive Wealth Market Musings #6

Opportunities in a Rate-Hike cycle

The first rate hike is out of the way and there were no surprises. That was enough to send the market into a frenzy of short covering and bargain hunting. Given the extreme oversold conditions this was to be expected and the market did not disappoint. Now we have a few weeks of low news-cycle besides the war. The next big inflection point should be the March CPI data and then the FOMC in May. Of course in the middle we kick off the earning season starting about the second week of April. Between now and then let us say the next six weeks we should continue to rally. The seasonality data also supports the markets.

The Fed will have to watch out for slowing growth so they do not push the economy into recession quickly. They also have to take into account the new realities with continued supply chain disruption and a burgeoning Cold War. They have already taken down the growth estimates to 2.8% towards end of the year. That is still above trend growth for the US economy and should be positive for the markets.

Looking at Sector performance, the story has not changed much YTD. Energy, Materials, Utilities and Consumer Staples have outperformed the broader market. However post FOMC picture is very different. Technology, Consumer Discretionary and Financials have outperformed, all of them coming of extremely oversold levels.

Let us look at Industries that could benefit from the current macro situation.

1. Defense Industrial Complex is an obvious trade in the current geo-political situation. The war in Ukraine is dragging on and a quick settlement seems unlikely. At the same time, the level of worry among the NATO countries in the east is at a multi decade high. The situation is no different in Asia with Japan and South Korea responding to threats from China and North Korea. All of this points to a sustained buildout of military capabilities in these regions. This is one area where the US still maintains a significant lead in technology and manufacturing. I am particularly interested in sustained and ongoing income-stream from defense capability buildouts. For example as we do more airspace control along the NATO borders this will require a much more frequent replacement of engines on the fighter jets. That supports companies like Raytheon and GE, In a similar fashion KTOS which makes tactical UAV’s (drones) and Ariel target drones will be in greater demand as US and allies start testing their weapon systems more regularly in preparation for threats. RTX and GE also benefit from normalization in air travel and when the 787 line starts moving again, that will be nice kicker in income.

2. Cyber Security is going to be a big winner with multiple secular trends in favor of the industry. The developing cold war situation with Russia and China is likely to primarily played out in the cyberspace. Hacking has been increasingly weaponized by state sponsored actors from China, Russia, North Korea and Iran. This has prompted both governmental entities and corporations to significantly scale their spend on security. This spend is unlikely to be affected in the near future irrespective of economic situation. We called out MNDT in a post on March 2nd and GOOGL announced a buyout of MNDT on March 8. This is only the beginning and we expect to see much more consolidation in the industry. We still like our earlier calls on S & ZS.

Trade Idea on ZS and S :

After 4 days of run on S and ZS, I am again waiting for a pullback. But S has bounced from FIB target. The solid red line shown on the chart. Currently there is not much credit to sell premium at 30 level. So, waiting for this to pullback and maybe some more volatility to come back to sell 30 Puts.

3. Agriculture: Trade war even from the previous administration was centered around expanding US Agricultural exports to China. Now with supplies from Ukraine and Russia being restricted, the vacuum should be filled by US, Canada, Brazil, Argentina and Australia. This should benefit a whole host of industries from Agricultural Machinery (DE, AGCO, CAT), Fertilizers (MOS, NTR, CF), Farm Products (BG, ADM).

Trade Idea on DE:

DE closed at ATH. It is breaking out too. Any retest of 400 level and bounce will be the perfect entry. May 20th is May OPEX and DE’s earnings.

A simple measured move grey rectangle is shown on the chart. This price of 470 also coincides with the FIB level red dotted line. If this week we get a test of the 400 price then April 14th 430/440 Call spread could be done for $2 per contract.

4. Here is a contrarian call from Monetive. We have been positive on Biotech sector for a recovery play for the past 2 months. We are now ready to call a bottom on Biotech and will be adding positions in the sector in the coming weeks. We will be looking at a Long-Short strategy here going long on XBI and shorting some healthcare/pharma companies that are overextended from a valuation perspective. We will have a dedicated post on this soon.

Trade Idea for Income: We have been selling puts on XBI. It has been working well. Every time in the last 2 months whenever there is a pullback in XBI, we have been selling May and Jun 80 puts. All this while the volatility was high and hence we were receiving nice credit for the trade.

Now that the volatility has come down, our plan is to wait for any pullbacks in XBI to sell premium.

Selling May 80 strike Puts or Jun 75 strike Puts is in our plan. But this trade goes on only when there is a pullback and/or volatility spike.

Finally a reminder that these are out opinions only and not a trade recommendation. Please always do your own due diligence and/or consult a registered investment advisor.