Every so often I talk about known and unknown uncertainties, and the power they have to derail markets, especially in today’s volatile environment.
The latest uncertainty, which became known after the markets closed on Friday, was S&P’s downgrade of U.S. debt from its sterling AAA rating to AA+. While the possibility of a downgrade was not breaking news, the sudden timing of it sure was.
Most analysts I have read are just uncertain about market reaction as you may be. The common thread was that there might be some increased volatility for a couple of days or so until things settle down. I would agree with that.
More downside action will most certainly push our Domestic TTI into bear market territory, as last week’s weakness may continue for the time being. The sharp downturn changed the composition of our ETF Master Cutline list in that there are currently only 38 ETFs listed above the line (down from 188), while the bearish side now shows 358 ETFs (up from 208).
Take a look at the latest report:
[If you are not familiar with some of the terminology used, please see the Glossary of Terms.]
Only 2 ETFs are sporting positive momentum numbers along with 0.00% in the DD% column.
If things get even worse, we may end up with hardly any ETFs above the line. Long-term that would be a good thing, as bearish forces will eventually end, and the bulls will get the upper hand. That will be the time, when the cutline will be most beneficial as you can follow ETFs crossing to the upside, which offers you the opportunity to get on board early.
Again, that is the long-term benefit. This is not the time to be a hero and engage in bottom fishing as the trends clearly point down. Right now, you need to step back and let this situation play out until better opportunities present themselves.