My Anti-Wall Street Wealth Generator
The stock market huffed, and it puffed, and earlier this week the S&P 500 finally blew through it’s January peak notching new, all-time highs.
Following suit was the small-cap Russell 2000, which actually has made a series of new highs since mid-May.
Conspicuously absent from the parade were the Dow Jones Industrial Average – although the Dow Transports did notch a new high – and Nasdaq 100.
I’ll be watching for those large-cap stock indices to follow through soon as a sign of bullish market breadth.
But where do stocks go from here?
Trade war worries are still a clear and present danger to financial markets, with more import tariffs against China scheduled to take effect today.
Also, stock market seasonality is historical poor at this time of year, as I reported previously. September is historically the worst month for stock returns as you can see below.
Source: BofA, Merrill Lynch Global Research
Also, once stocks clear the hurdle to new high ground there are naturally fewer eager sellers. This is because most investors are now “up” on their holdings, meaning less selling pressure.
This could perhaps be the start of a market melt-up scenario by year’s end, but I’m willing to wait and watch for the upside to follow through for the time being.
Going long on stocks is a very crowded trade right now, with both institutions and individuals loading up. Professional money managers are near-maximum overweight in their allocation to U.S. stocks.
Plus, retail money is flowing back into equity ETFs at a strong clip.
Meanwhile, one of the most hated markets on the planet is government bonds, and not without good reason.
Interest rates are on the rise, with the Fed hiking short-term rates five times and signaling more to come. Inflation is on the rise as well, thanks to a strong U.S. dollar (importing inflation) and a tight labor market, which is finally spurring wage gains.
Bond market sentiment is at an all-time negative, but from a contrarian viewpoint is likely a near-term buy signal.
In fact, Treasury bonds are also a very crowded trade… But in the opposite direction.
Source: Bloomberg, CFTC
As you can see in the chart above, net-short positions in the 10-Year U.S. Treasury Note have hit an all-time record. This indicates extreme negative sentiment in the Treasury market on the part of big speculators, like hedge funds.
What typically happens after such extremes in speculative positioning – either long or short – is a major reversal in the opposite direction.
In a market that is this heavily shorted, the risk is amplified by the strong possibility of a short-squeeze. This happens when big, wrong-way bets by institutional investors start to go bad, forcing them to “cover their shorts.”
Of course the forced buying, together with natural investor buying, can amplify the move higher in Treasury bond prices in a big way.
So rather than “chasing” stocks at record highs, a smarter, contrarian trade would be to fade the record short interest in Treasury bonds.
One way to easily accomplish this is with the leveraged ProShares Ultra 7-10 Year Treasury ETF (UST), which as a bonus gives you twice the upside potential.
As bond prices tumbled over the past year, UST fell from $60 a share last September to just $54 per share now.
A reversal back to last year’s high for Treasury bond prices implies a double-digit gain for UST.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
Editor’s note: UST isn’t the only to create wealth. I’ve identified a basket of stocks that will pay you COLD HARD CASH whether the markets through the roof or in the gutter.
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