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My indicators continue to flash strong sell signals for the second week in a row, which came as no surprise given the dramatic selloff we have witnessed this week. I’ve been warning that a sharp drop in stock prices could happen at any time and, while I was slightly off on the timing, all it took was a minor change in interest rates to really push investors towards a risk-off stance.
One of the issues is that the Federal Reserve is starting to shrink its balance sheet, as it removed about $20 billion of liquidity at the end of January. It plans to continue to reduce its holdings by $20 billion per month going forward, and that’s having the effect of decreasing the amount of capital out there in the market. This will also continue to drive yields higher and stocks lower.
The market is always trying to trick investors when they least suspect it. We just wrapped up one of the longest periods of low volatility in history and the longest period without a 3% correction and, just as the market was soaring to new all-time highs and investors were getting confident about future prices, the market tanked and brought everyone back to reality.
During this type of market, my suggestion is to use any rallies to exit weak, underperforming positions because we just don’t know how far the market will fall. Because I am not sure that the selling is finished yet, I recommend that every investor be cautious and maintain some downside protection. To that end, today I am recommending puts on Kraft Heinz Co (NASDAQ:KHC):
Buy to open the KHC Apr 67.50 Puts (KHC180420P00067500) at $1.60 or lower.
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