Flow State #56

One sided markets never end in favor

Welcome back everyone!

Last week was exceptional, with the notable addition of the market structure section to the Emini analysis on a daily basis. Moving forward, the Flow State series will include swing timeframe profile analysis, along with my insights on market structure for the upcoming day. For the benefit of our free subscribers, here's an overview of what you can expect in the sections below:

• This Week's Events Breakdown: A detailed analysis of key economic events that could impact the markets this week.

• This Week's Earnings Breakdown: An overview of major company earnings reports scheduled for release this week and their potential market implications.

• COT Report with Setups: Analysis of the latest Commitment of Traders report, along with trading setups based on the data.

• Momentum Gallery with Portfolio Spreadsheet (Swing Trades): A curated selection of momentum stocks, accompanied by a portfolio spreadsheet for swing traders.

• Monday's Emini Volume Profile Setup: A specific setup for the Emini based on volume profile.

• Monthly/Weekly Volume Profile Structure (ES, NQ, GC, & CL): An analysis of the volume profile structure on a monthly and weekly basis for key markets including ES, NQ, GC, and CL.

• Monday's Daily Plan (Intraday levels on ES, NQ, GC, CL, SPY, AAPL, TSLA, NVDA, MSFT, AMD, META, GOOGL, & AMZN): A comprehensive plan for Monday, featuring intraday levels for major indices and stocks.

Before we delve into the rest of this newsletter, I'd like to share some valuable content with our readers. Please note that this information is readily available on the internet, so it's not exclusively created by me. However, it's compiled here for your convenience and easy reference.

This is Merrill Lynch’s Investing Timeclock:

Let’s quickly jump into what this is and then soon I will release an in depth guide on how to put this into action.

The Merrill Lynch Investment Clock is a conceptual model developed by Merrill Lynch, a prominent investment bank, to illustrate the relationship between economic cycles and investment strategy. This model has been widely used by investors and financial analysts to understand market trends and make informed investment decisions. In this article, we will delve into the details of the Merrill Lynch Investment Clock, exploring its components, how it works, and its implications for investors.

1. Recovery Phase

• Characteristics: The recovery phase is marked by an upturn in economic activity. Key indicators include rising GDP, improving employment rates, and increased consumer spending. Interest rates are often low, as central banks aim to stimulate growth.

• Investment Strategy:

  • Equities: This phase is generally favorable for stocks, particularly in sectors that benefit directly from economic growth. These include consumer discretionary, technology, and industrial sectors. As consumer confidence and spending increase, companies in these sectors often see improved earnings.

  • Growth Stocks: Companies that have the potential for above-average growth are particularly attractive. Investors might focus on firms with strong balance sheets, innovative products, or those positioned to capitalize on emerging trends.

  • Risk Appetite: Investors are typically more willing to take on risk during the recovery phase, seeking higher returns as the economy strengthens.

2. Overheat Phase

• Characteristics: The overheat phase is characterized by high economic growth but accompanied by rising inflation. Central banks may start increasing interest rates to prevent the economy from overheating.

• Investment Strategy:

  • Commodities: As inflation rises, commodities like gold, oil, and other raw materials often increase in value. These assets are seen as a hedge against inflation.

  • Real Assets: Investments in real estate and infrastructure can also be beneficial as they tend to retain value and even appreciate during inflationary periods.

  • Sector Selection: Certain sectors like energy and materials may outperform as their underlying commodities rise in price.

3. Stagflation Phase

• Characteristics: Stagflation is a challenging phase with low economic growth and high inflation. It can lead to stagnant wages and reduced consumer spending.

• Investment Strategy:

  • Defensive Stocks: These are stocks of companies that provide essential services or products, like utilities, healthcare, and consumer staples. They tend to have stable earnings regardless of economic conditions.

  • Certain Commodities: Gold is often considered a safe haven during stagflation, as it maintains value even when currency values fluctuate.

  • Diversification: Diversifying investments across different asset classes can help mitigate risks during this uncertain phase.

4. Recession Phase

• Characteristics: A recession is marked by declining economic activity, falling GDP, and increasing unemployment. Central banks may reduce interest rates to stimulate the economy.

• Investment Strategy:

  • Bonds and Fixed-Income Assets: Government and high-quality corporate bonds are preferred for their relative safety. They provide fixed income streams and are less volatile compared to equities.

  • Quality over Quantity: Focus on bonds with high credit ratings, as they are less likely to default.

  • Defensive Stocks: Even within equities, preference might shift to defensive stocks, which are less impacted by economic downturns.

Now let’s move on to the rest of my analysis for the week ahead!