Summary

• Recent US data including home sales have been very depressing to say the least. Nevertheless, it is not affecting Wall Street, as stock markets are at new highs.
• Intervention over the years by the Fed has created bubbles in many asset classes. The one forming at the moment is biotech.
• When biotech goes vertical, we will prepare to lighten up on our equity positions in our portfolio.

The S&P500 SPDR S&P 500 ETF Trust (NYSEARCA:SPY ) continues to rise (up 2.8%) in the last 5 days alone. However, there is a clear divide emerging between Wall Street and Main Street. The Fed has made it clear that it will do everything in its power to protect the stock markets. The S&P500 tanked to 1,860 (5% drop) last October but it is becoming alarmingly clear that the FED is not going to let this type of correction happen again. Recent market action has illustrated that the Fed wants to totally avoid recessions instead of rescuing the economy from them. We definitely have manipulated markets so as investors, we need to trade and invest accordingly. Lets go through this article and explain why there is a divergence between Main Street and Wall Street and how investors can profit from this divergence.

First, let’s go through some data that came out of the US recently. Below is a chart of the projected US Empire State Manufacturing Index going forward. This index reports the change in 11 indicators including the level of general business activity, new orders, shipments, inventories, number of employees, delivery time, and capital expenditure, etc.

The index dropped to 7.78 this month (February 2015), but what’s more worrying is the general trend predicted by this agency. Does this chart symbolize an improving US? Also (as I write) home sales in the US are at a nine month low (sales down nearly down 5% in January). Moreover weekly mortgage applications are down as mortgage rates have begun to rise slowly. All the recent data points to a slowing economy, so why are we at record highs in the S&P500? We are at record highs because the equity markets in the US have been protected by the Fed through quantitative easing measures and negative nominal interest rates. It is ludicrous to believe that record highs in the stock markets signal a strong US economy with the Fed on the verge of announcing QE4. How can the Fed now raise interest rates? It would destroy an already declining real estate market.

So as investors, how can we invest in this market? Well, I believe the chart below says it all. Interventions by the FED have created bubbles in different asset classes over the last 15 years. First we had the tech bubble in 2000, then we had the real estate bubble in 2008, then the oil spike to $147 a barrel followed by the subsequent crash and then Gold in 2011 when it spiked to just under $2,000 an ounce

Then we had the Bitcoin (bubble & crash) in late 2013.

The problem with printing money is that nobody knows which sector the money printing is going to affect in the short term. Unintended consequences always emerge in every asset class over the long term but it can be difficult to predict asset class movements in the short term. For example, the US equity markets have been the main benefactors (in the short term) from Fed easing in the US. So which sector within the general stock market is going to be the next bubble? I believe it will be the biotech sector. Look at the chart below to see how this sector has outperformed the S&P500 over the last 10 years

When this sector tops, it may be the start of a severe stock market correction. I am watching iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB ) very closely. This ETF will probably go vertical before rolling over. When it rolls over, we will lighten up on our equity positions in our portfolio and deploy fresh capital accordingly. It will be difficult for the precious metals sector to rally in earnest until money comes out of the equity markets in droves. This is why the biotech sector is key. It is the one sector that is nearest to being in a bubble and the sector is definitely big enough to turn down the general equity markets.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.