Today, the US Federal Reserve will meet again to discuss another rate cut to prevent a recession and stabilize the US economy. In conjunction with the re-election of Donald Trump to the White House, these two events signify a new support level for the capital markets. What is the support level and where should you hedge next?
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In technical trading, the support line is a price range where the value of a stock reaches a level that attracts significant demand, thereby ensuring the stock does not nose-dive to the bottom of the ocean. When the support line is reached, a wave of fluctuations occurs above and below it. As the economy and businesses grow (positive indicators), bigger, sharper increases in the stock value will follow. The converse is also true.
Many reasons exist for how support levels are created, most of which are the unknown analysis of individual investors. However, there are two surefire ways to discern why support levels are created: macroeconomic data and institutional investors.
In October 2024 the US Federal Reserve first announced their decision to cut interest rates for the first time since the COVID pandemic. The rate cut of 50 basis points to lower the target rate between 4.75%-5.00% signaled to the US economy and global economy that “be wary of rising unemployment, but expect the US economy to grow albeit steadily.”
Understanding the Fed’s three most important charts will guide investors and short-term traders on where to hedge.
Real GDP
The change in real GDP chart above indicates where the Board Governors of the Federal Reserve estimate where real GDP will be in the longer run. The US Economy is guiding towards annual modest growth of 2.0% over the next few years, eventually settling below 2.0% percent over a 5-year period.
Advanced economies rely on a stable 2.0% annual growth in their GDP. Agree or disagree on this arbitrary 2.0% rate is an epistemological battle, but denying its historic trend and the ensuing results suggests that stable growth wins in the long run.
Unemployment Rate
The Board of Governors expect the longer run unemployment rate to be where it is today, around 4.2%. In actual numbers, with approximately 170 million employed individuals in the US, the current unemployed is approximately 7.1 million.
Like real GDP, the guidance of the unemployment rate means stability.
(Students of 24Hour Investing are familiar with the term “having stability means better predictability.)
PCE Inflation
PCE Inflation, or Personal Consumption Expenditures, is data from actual consumers of the US economy. Unlike CPI, or Core Price Inflation which uses data from businesses, PCE tells us where consumers are actually spending money. The goal of every advanced economy is to achieve 2.0% year-over-year inflation.
As PCE stabilizes back down from its generational highs of 6% to 2%, consumers can expect that by keeping their monthly budgets the same, then their monthly expenses will also remain constant over the long run.
With the Feds expected to make their second interest rate cut today, we’ve entered into a new support line for the capital markets.
The second reason that justifies a new support line has been created is the involvement of institutional investors.
Institutional investors operate like a bank at its foundational level — take in deposits (or investor’s capital), loan out those deposits for interest (invest in companies to receive an ROI), and safe harbor money. Except a loophole exists such that the money that is “safe harbored” is invested into the capital markets. This loophole has made hundreds of billions of dollars for institutional investors.
So, when a stock reaches a price that according to their analysis makes it a good buy, they will make the big purchases thereby creating a support line of millions of dollars in investments.
If you as an individual investor decide to invest in the same stock, then you have greater levels of comfort and security knowing that the chances of your investment going to $0 are less likely because you have the backing of institutional investors.
Where to Hedge
Two ETFs which I am trading for “moderate to exponential” growth over the next year are Direxion’s Daily NYSE FANG 2x-leveraged ETF FNGG 0.00%↑ and Direxion’s Daily Regional Bank 3x-leveraged ETF DPST 0.00%↑.
FNGG invests in 10 technology companies. At the moment, they are:
Apple AAPL 0.00%↑
Amazon AMZN 0.00%↑
Broadcom AVGO 0.00%↑
Crowdstrike CRWD 0.00%↑
Google GOOG 0.00%↑
Meta META 0.00%↑
Microsoft MSFT 0.00%↑
Netflix NFLX 0.00%↑
Nvidia NVDA 0.00%↑
ServiceNow NOW 0.00%↑
With a stable economy, the big tech players have foundational value in this post-COVID economy and may not see the explosive growth they’ve encountered over the last three years, but they will enjoy steady growth at a rate consistent with moderate-to-exponential.
DPST tracks the regional bank sector, the nation’s backbone of the banking system. Regional banks are important for the investment they make directly in the communities they serve. With previous illiquidity issues regional banks encountered from the COVID-economic fallout, regional banks may finally have found their footing in light of the Federal Reserves rate-cutting cycle and with the presidential election of Trump.
As noted above, PCE Inflation is leveling off and consumer bank accounts will guide banks how much they can provide in loans based off consumers maintaining a steady deposit balance.
With DPST being a 3x-leveraged ETF, the stability and steadiness of the regional banking sector mixed with a leveraged ETF fits the criteria of an investment opportunity that is “moderate to exponential” growth.
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