From Matt: Today, we’re going to hear from my Critical Signals colleague, Tom Lott. He’s a trusted friend of course, and a trading genius – this video will tell you everything you need to know about Tom. He’s going to share a simple chart that actually shows you the flow of money throughout sectors right now.

The chart has just a few of the hundreds of indicators Tom continually tracks and which, together with my macro analysis, we distill into simple, profitable trading signals for our Critical Signals readers.

We took a look at the chart I shared with you earlier this week, but there’s so much profit potential, so much power here that I want us to take another look at it.

I really want every one of our readers to understand just what’s going on here. As we begin to trade these “crazy markets,” as Matt often puts it, this’ll inform a lot of what we do.

Matt and I call this a “Heat Map” because… that’s what heat maps do; they map varying market “temperatures,” in varying colors, recorded over specific time intervals – in this case, weekly.

Matt and I especially like the weekly time frame, and we think you will, too. Daily timeframes are just too short, too noisy, and too robotic for the “sun,” (the trend and the fundamentals) to shine through. On the other hand, a monthly timeframe is too long; if we wait for an entire month to see what’s going on, we might miss out on lucrative trading opportunities.

Let’s jump right in…

There are four quadrants (Let’s call them “Quads”) to the Heat Map, labelled 1-4 below, each deliberately color-coded:

  • Quad 1 (Light Green) – A recovering market; look to buy.
  • Quad 2 (Dark Green) – A bull market; get long, buy now.
  • Quad 3 (Yellow) – A weakening market; look to sell.
  • Quad 4 (Red)- A bear market; get short, or get out.

We’ll get a little further into what the Quads do in a moment; now here’s our Heat Map:

Relative Strength: Why the Quads Are So Powerful

What we are looking for here is relative strength among sector ETFs. We always start with the sectors first, and then drill down to the stocks within them second.

Picking the leading (or lagging) sectors is a critical art essential to beating the markets – you could think of all of this as an ‘artful science.’

If we know that relative strength is building, we’ll look to establish a long position, as long as a few other indicators are lined up as well. You’ll hear much about that soon.

If we see relative weakness in a sector, as in a melt-down for example, no problem. We’ll be looking to exit any long positions that may be harmed and establish shorts (or buy puts) on fresh weakness in any sector.

Stated otherwise, whichever direction these Twilight Zone markets go, near and long term, we – our readers – will be two steps ahead.

For now, here’s how to read the Quads:

Quad 1 (colored light green) maps those sector ETFs that are emerging from weakness, or have been oversold – our favorite for making big bucks on the upside. Quad 1 is a great Quad for signaling emerging trends and for green-lighting further analysis. No trigger-pulling yet, but close.

Quad 2 is colored in a darker green, signaling a strong trend in the ETFs included. In this week’s Heat Map (above), no less than seven ETF Sectors are spotted in Quad 2. These sectors are on the move.

Quad 2 is where we make most of our money. But beware: The Quad 2 ETF’s are ranked, top-to-bottom for a reason.

The sector at the top of the Quad 2 list – the Technology sector in this case – is a timelier investment than the Consumer Discretionary sector, at the bottom.

Technology has currently been exhibiting considerably more relative strength than the Consumer Discretionary Sector, which has tumbled to the bottom of Quad 2 and is about to join its brethren (Consumer Staples) in Quad 3, our Cautionary Quad – thus colored in yellow.

Now, this is a good opportunity to take a minute and see if the fundamentals corroborate the position of the Heat Map. With one consumer ETF in the bottom of Quad 2 and another consumer ETF in Quad 3, something not-so-good is being signaled about consumption.

Sure enough, as Matt has shown again and again, the American middle class is at “peak debt,” and struggling mightily… while Wall Street and the top 1% enjoy all the fruits of the Fed-driven party, raging since 2009, with D.C. money-printing on “overdrive.”

That means we should start looking to exit consumer stocks, if not begin looking for consumer stocks to short-if the signals so confirm. And that’s because the Consumer is starting to crack.

Sure, retail sales may still be up – but barely as we head into Q4/2019. The Consumer is critical to underpinning U.S. stock markets, one of the last leading indicators that’s still positive.

Consumers, moreover, make up 70% of our GDP, but as we’ve recently shown, 0.3% GDP isn’t exactly ripping…

As that holiday music in the stores reminds us, we’re heading into the December holidays, so spending should be rising.

As of now, however, it’s not. In fact, it’s cooling. Perhaps those 300 million credit cards Matt mentioned keeping the American base afloat are starting to max out?

Take a look at last December – that didn’t work out so well. Just saying…

Which brings us to Quad 4, that notoriously weak Quad (colored in red) where we keep an eye out for ETFs that are being hammered and are extremely oversold.

In Quad 4, we thrive on our shorts while scouting for potential buys as ETFs rotate back to Quad 1.

Here’s the Bottom Line About the Quads

You can think of Quad 1 & Quad 2 as “Buy Zones.” We want to be long the leading stocks and related options that underly any ETF in the green Buy Zone that are otherwise signaled. And we want to be short (or at least exit our long positions) in the stocks (and related options) when they track into the Sell Zone.

Buy in the upper half of the Heat Map. Sell or sell short in the lower half. That’s really all you have to know for today.

Now I get how twisted this all may seem… four quads of varying strength, spotting both buying and shorting opportunities among stocks that underly Sector ETF’s as they rotate from strength to weakness and back to strength again.

That’s a mouthful but no worries. We’ll be tracking this for you. Always.

That’s why Matt calls me, “Tommy Spreadsheet.” I’ve been brushing my teeth on spreadsheets linked to Bloomberg terminals for decades, as a Commodity Trading Advisor (CTA) and Commodity Pool Operator (CPO) in the far-steeper terrain of futures trading.

But here’s one lesson we have both learned over the years: Keep it simple.

Derivatives like futures contracts are over-complicated by leverage, loss, and overdosing by the greedy amongst us (i.e. our old pals on Wall Street). Stocks are easier, trust me. And stock options are a far safer place to leverage returns.

We are really excited to show you what we’re working on, to “de-complicate” this melt-up market for you. Matt will do the macro; I will do the math. All you need to do now is to prepare to trade.

Keep your eyes peeled: On Friday, Matt and I will be drilling down into the Technology sector, as tracked by the Technology Select Sector SPDR ETF (NYSEArca: XLK). The stocks underlying that tech ETF mean it occupies, at present, a winning position atop Quad 2.

But not all tech stocks are worthy of your hard-earned capital… We’ll be showing you why.

Stay safe – and stay tuned


Matt and Tom


3 responses to “Here’s the Key to Making Money in the Fed’s “Crazy” Markets”

  1. Love the technicals–but please keep the big picture articles coming–they keep all this in perspective for us realists. Very curious to know just how safe this melt-up really is–as this feels like a precarious high for all the reasons you’ve plainly shown. Here in Germany, more experten are finally startiing to talk about the euro-dollar issues you raised previously. I see why you hate this bull market, and the Fed’s wind beneath it–and I get the bond market warning signs–negative yields here prove. Would love more of your opinion on how this plays out from 30,000 feet (or 10,000 meters). Can’t say enough how much we rely upon your candor. Gunther

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