A “warning sign” is starting to appear in the market amid new record highs for stocks, says Todd Gordon of TradingAnalysis.com, and two charts suggest that the rally may be fading.
Looking at a chart of the S&P 500-tracking ETF SPY and the dollar-tracking ETF UUP, Gordon says that it appears as though the two “have enjoyed somewhat of a positive correlation.” In other words, the chart of SPY and UUP have moved together since late 2016, and Gordon believes that since UUP has fallen lately, the SPY, so stocks, may follow soon as well.
Second, Gordon takes a look at a chart of the SPY against the gold-tracking ETF GLD and long-term-Treasury-bond-tracking ETF TLT, saying that the recent rally in GLD and TLT could be pointing to two possibilities.
“It’s either going to be a Fed that’s going to be much more accommodative for much longer than we thought, and that’s why we’re seeing the dollar sell off with gold and bonds rallying,” he said Tuesday on CNBC’s “Trading Nation.” “If in fact the Fed is prepared to go ahead and continue to raise rates, perhaps we’re starting to see a run into the safety of gold and bonds out of the dollar because the stock market might not like the future interest rate increases.”
Since Gordon believes that stocks are going to fall and a run into safety trades may be ahead, the trader wants to go long TLT. Gordon is looking to buy the March 3 120-strike calls and sell the March 3 123-strike calls for a total of $0.93.
This means that if TLT does close above $123 on March 3, Gordon could net a maximum reward of $207, more than doubling his money in the process. But Gordon stands to recapture the amount he’s spending on the trade so long as the TLT closes above $120.93 on expiration day, which is less than 1 percent from the TLT’s current levels.