Here’s a tradeoff to outperform the market during periods of high inflation

It’s not just Wall Street that’s worried about stagflation, the dangerous combination of a slowing economy plus rapidly rising prices.

The chart below shows worldwide searches on Google for “inflation” (line in blue) and “bearish” (red). Given that concerns about both inflation and economic contraction may be self-fulfilling, the rise in interest in recent months is worrying.

Google Trends searches for “inflation” and “bearish”

For Jay Capel, Senior Research Analyst at Sentiment Trader, the inflationary environment in particular is making life very difficult for investors.

“It seems like there’s nowhere to hide. There’s a real cash crunch, stocks (and bonds) are falling, and even gold isn’t doing what we’re told. was that he should,” he says.

But they have found what they describe as a simple strategy — switching between consumer-oriented and discretionary spending exchange-traded funds — that has helped investors outperform during periods of extreme price growth.

“For our purposes, extreme inflation occurs when the consumer price index rises by more than 3% from its level a year ago. Excessive deflation occurs when it falls by 3% or more (we’ve seen it decades ago). Done),” says Keppel.

His chosen vehicles for this trade are Consumer Staples Select Sector SPDR Fund XLP, +0.49% and Consumer Discretionary Select Sector SPDR Fund XLY, -0.86%.

The execution is as follows. If the latest CPI inflation reading (taken at the end of the month) is greater than or less than 3% or minus 3%, the XLP is held during the following month.

But if the latest CPI is moderate within the plus/minus 3% range, then XLY is held for the next month.

For baseline, the switching strategy was compared with a 50/50 split between two funds, each rebalanced at the end of the year. In short, this strategy is taking advantage of the tendency for consumers to spend relatively more on staples during periods of high inflation.

And the result? According to Capel: “Since the first full year after these funds were founded in 1998, the switching strategy returned +1,397%, nearly triple that of the rebalancing strategy. And it did so while facing a smaller maximum loss and low down years.” fell.

“There are not many ways to hedge against inflation, but switching between these two funds has been an effective method,” he concluded.

The S&P 500 futures ES00 fell -0.33% 7 points, or 0.2 percent, to 3963. The dollar index DXY, +0.49% rose 0.1 per cent to 106.58 and gold GC00, -0.13% 0.2% to $1,722 an ounce. Bitcoin BTCUSD is down -4.78% by 4.8% to $21,100. Crude oil futures CL.1, +1.78% rose 2.1% to $98.70 a barrel.

Walmart WMT, -0.14% stock sank after a profit warning citing the impact of inflation, beating other retailers such as Amazon AMZN, -1.05%.

European gas prices jumped again, with the ICE Dutch TTF gas futures contract up 7.2% to 189.25 euros per megawatt-hour after Russia further cut supplies.

US second quarter earnings season continues. 3M MMM, General Electric GE, +0.25% and General Motors GM, -0.43% publish numbers before the market opens. Alphabet GOOG, -0.14% and Microsoft MSFT, -0.59% followed the closing bell.

US economic data on the slate includes the May S&P Case-Shiller national home price index at 9 a.m., the July Consumer Confidence Index and new home sales for June, both at 10 a.m., all Eastern.

Much was done last week in a Bank of America survey that showed fund managers are spectacularly pathetic. So much downbeat, in fact, that things with multiple logic can only get faster. Here is another example of extreme caution. The charts from JPMorgan note that open interest on the CBOE VIX call at a strike price of 40 or higher has recently reached record highs. A VIX spike above 40 only occurs when the market takes a dive. A lot of people are betting/hedging for this.

Here were the most active stock-market tickers on MarketWatch as of 6am.

anchorsecurity name
GME, -5.03%GameStop
TSLA, -1.40%Tesla
Xella, -0.25%Excella Technologies
AMC, -3.81%AMC Entertainment
AMZN, -1.05%heroine
NiO, +0.47%NIO
AAPL, -0.74%Apple
RDBX, +81.97%redbox entertainment
WMT, -0.14%walmart
SNDL, -0.50%solarium producer

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