By Simon Black

Today’s the day.

After months of preparing financial markets for this news, the Federal Reserve is widely expected to announce that it will finally begin shrinking its $4.5 trillion balance sheet.

I know, that probably sound reeeeally boring. A bunch of central bankers talking about their balance sheet.

But it’s phenomenally important. And I’ll explain why-

When the Global Financial Crisis started in 2008, the Federal Reserve (along with just about every central bank in the world) took the unprecedented step of conjuring trillions of dollars out of thin air.

In the Fed’s case, it was roughly $3.5 trillion, about 25% of the size of the entire US economy at the time.

That’s a lot of money.

And after nearly a decade of this free money policy, there is more money in the financial system than ever before.

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Below please find the latest High Volume ETFs Cutline report, which shows how far above or below their respective long-term trend lines (39 week SMA) my currently tracked ETFs are positioned.

This report covers the HV ETF Master List from Thursday’s StatSheet and includes 366 High Volume ETFs ETFs, defined as those with an average daily volume of more than $5 million, of which currently 278 (last week 294) are hovering in bullish territory. The yellow line separates those ETFs that are positioned above their trend line (%M/A) from those that have dropped below it.

Take a look:

The HV ETF Master Cutline Report            

In case you are not familiar with some of the terminology used in the reports, please read the Glossary of Terms.

If you missed the original post about the Cutline approach, you can read it here.

ETF Tracker StatSheet

http://www.theetfbully.com/2017/09/weekly-statsheet-etf-tracker-newsletter-updated-09212017/

EKING OUT SMALL GAINS

[Chart courtesy of MarketWatch.com]

1. Moving the Markets

A late bounce helped the major indexes to gain enough upward momentum to eke out some small gains for the session with the exception of the Dow, which fell short and remained in the red. Despite this rebound, Apple (AAPL) continued its September downward trend having lost now -7.4%, as the company experienced its worst week ahead of an iPhone launch in over 7 years. Going the opposite direction were SmallCaps with the Russell 2000 ending at a record, which is its first record close since July 25^th. While there is no guarantee, this move to new all-time highs can certainly be considered as a bullish indicator.

Despite the meandering of the major indexes, things ended on a much more solid footing in ETF space. Leading the pack to the upside were Semiconductors (SMH), SmallCaps (SCHA) and Transportations (IYT) with gains of +0.41%, +0.40% and +0.33% respectively. We saw the only red number in Emerging Markets (SCHE) with -0.58%.

In the interest rate arena, the yield on the 10-year Treasury bond pulled back 1 basis point to 2.26%, which helped the 20-year bond price gain +0.29%. Gold managed to conquer its $1,300 level again but only barely. The US Dollar completed its best 2-week rally since December but lost a tiny -0.08% for the day. However, the downward trend remains intact.

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ETF Data updated through Thursday, September 21, 2017

Methodology/Use of this StatSheet:

1. From the universe of over 1,800 ETFs, I have selected only those with a trading volume of over $5 million per day (HV ETFs), so that liquidity and a small bid/ask spread are assured.
2. Trend Tracking Indexes (TTIs)

Buy or Sell decisions for Domestic and International ETFs (section 1 and 2), are made based on the respective TTI and its position either above or below its long-term M/A (Moving Average). A crossing of the trend line from below accompanied by some staying power above constitutes a “Buy” signal. Conversely, a clear break below the line constitutes a “Sell” signal. Additionally, I use a 7.5% trailing stop loss on all positions in these categories to control downside risk.

3. All other investment arenas do not have a TTI and should be traded based on the position of the individual ETF relative to its own respective trend line (%M/A). That’s why those signals are referred to as a “Selective Buy.” In other words, if an ETF crosses its own trendline to the upside, a “Buy” signal is generated. Since these areas tend to be more volatile, I recommend a wider trailing sell stop of 7.5% -10% depending on your risk tolerance.

If you are unfamiliar with some of the terminology, please see Glossary of Terms and new subscriber information in section 9.

1. DOMESTIC EQUITY ETFs: BUY — since 4/4/2016

Click on chart to enlarge

Our main directional indicator, the Domestic Trend Tracking Index (TTI-green line in the above chart) is positioned above its long-term trend line (red) by +2.64% after having generated a new Domestic Buy signal effective 4/4/2016 as posted.

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[Chart courtesy of MarketWatch.com]

1. Moving the Markets

The major indexes zigzagged throughout the session but ended up on a sour note by trending towards the day’s lows. The S&P 500 managed to defend its 2,500 level successfully—so far. Not helping the bulls for the second day in a row was Apple (AAPL), which dropped another -1.72% causing the Nasdaq to surrender -0.51%.

It was the ‘morning after’ the Fed’s latest policy statement and investors were already getting nervous when news from bond market made the rounds that the Fed “may risk a misstep if it follows the current path.” That was enough to keep equities in a tight trading range all day.

On the ETF side, red numbers prevailed as well with the Dividend ETF (SCHM) faring the worst with -0.38% closely followed by the International SmallCaps (SCHC) with -0.36%. Bucking the downward trend were Aerospace & Defense (ITA) with a gain of +0.57% and Transportations (IYT) with +0.21%.

Interest rates stopped their ascent to higher levels with the 10-year bond yield slipping 1 basis point to 2.27%. Gold got hammered and lost the battle to protect its $1,300 level; at least for the time being. The US dollar (UUP) pulled back after yesterday’s large move higher by surrendering -0.29%.

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[Chart courtesy of MarketWatch.com]

1. Moving the Markets

I had to laugh this morning when some news reports called the Nasdaq as having “plunged” in view of Apples weakness (-1.68%). It turned out that the Nasdaq merely retreated a meager -0.3% which appears to be, in that ‘new normal’ world we’re living in, quite a noteworthy drop. Go figure…

Of course, all eyes were on the Fed’s announcement about interest rates and the scaling back of the stimulus program. Indeed, they did come clean and projected the month of October to be starting point for the ‘great unwind’ of their massive $4.5 trillion balance sheet. However, they added that the reduction would be conducted “gradually and predictably,” at a rate of some $10 billion a month. They also signaled that a December rate hike may be still on the table.

As you can see from the above chart, the reaction was the usual one, namely a quick but modest sell-off followed by a rebound with only the Dow and S&P managing to climb back into the green and in the process setting new records. In ETF space, Transportations (IYT) came roaring back sporting a solid +1.48% gain. Aerospace & Defense (ITA) and MidCaps (SCHM) did well by adding +0.63% and 0.45% respectively. On the downside, our winner YTD, namely Semiconductors (SMH) lost -1.33%, while the International SmallCaps (SCHC) gave back a more modest -0.31%.

The yield on the 10-year bond rose by 1 basis point to end the session at 2.24%. Trading in a broad range was the US Dollar (UUP), which ended up +0.80% higher, however, it still hovers below its 50-day M/A and in bear market territory.

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