A New Week Revives Old Concerns

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

After the relentless buying of the past few weeks, a pause was in order, as I posted last Friday, and that’s what we got today. The markets opened to the downside and never recovered, despite an attempt during the last few trading minutes to minimize the day’s losses.

Last week’s hype about a China trade deal evaporated in a hurry, as U.S. officials turned down an offer by China to hold a preparatory meeting on trade negotiations due to lack of progress.

Then, China posted its slowest pace of annual growth (6.6%) since 1990, while some of their communist leaders cautioned to be alert over a “black swan” or “gray rhino” financial event in the face of an economic slowdown…

Additionally, the IMF, International Monetary Fund, added to the gloomy global picture by noting that it had cut global growth from 3.7% to 3.5% but left the U.S. estimate unchanged at 2.5%.

Other economic data points were postponed due to the partial government shutdown, but grim Housing data were released showing that existing sales not only slowed to 3-year lows, but last month’s sales were down 6.4% and 10.3% lower than a year ago.

In the end, last Friday’s trade hope gains were wiped out again, while breadth in the markets was bad with 95% of S&P stocks closing to the downside today. This makes me contemplate whether it’s time for stocks to catch down to reality again, as this chart shows.

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ETFs On The Cutline – Updated Through 01/18/2019

Below, please find the latest High-Volume ETF 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 322 High Volume ETFs, defined as those with an average daily volume of more than $5 million, of which currently 70 (last week 60) 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.

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ETF Tracker Newsletter For January 18, 2019

ETF Tracker StatSheet

https://www.theetfbully.com/2019/01/weekly-statsheet-for-the-etf-tracker-newsletter-updated-through-01-17-2019/

COMPUTER ALGOS SHIFT INTO OVERDRIVE

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Yesterday’s trade rumor caused the algos to shift into overdrive today after Bloomberg reported that Chinese officials were open to eliminating an imbalance with the U.S., which has been a major hurdle to trade negotiations since last year.

The follow up story was that China offered to go on a “six-year buying spree to ramp up imports from the U.S.,” which would greatly sooth the existing rocky relationship. China would increase purchases of U.S. imports over six years to reach more than $1 trillion per year and would also attempt to reduce its trade surplus ($323 billion) to zero by 2024.

The market took this as a confirmation that the deal was done, although it has not been confirmed, and computer algos ran with it propelling the major indexes to gains over 1% for the day. Despite the fact that consumer confidence collapsed the most to a level last seen in 2016, while ‘hope’ crashed the most since 2012, the markets barely noticed as all the attention was on the apparent “olive branch” China extended.

History shows that the stock market has not started a year this strongly since 1987, which ended with the Dow dropping -22.6% on that infamous October 19th debacle. While that does not mean that there will be a repeat performance, it means to me that sudden V-shape recoveries tend to be suspect, especially during times when computer algos and the Fed pretty much oversee market direction while underlying fundamentals no longer matter.

This article discusses the current algo rally and summarizes it as follows:

What this means, somewhat ironically, is that while everyone was blaming the algos for the December meltdown, even though nobody has “accused” the algos of creating the ongoing meltup, investors and traders know very well that the move higher is not organic, but is purely the result of systematic, algo and various other quant traders forcibly buying as a result of key technical market levels being hit.

 Unfortunately for the few humans left trading stocks, this is not a buying signal, which likely means that just like in January of 2018 when retail investors finally capitulated and rushed into stocks just ahead of the February 2018 correction, so this time too it is likely that the algos will keep buying until everyone else jumps into the pool… at which point the market will once again take the elevator down.

Be that as it may, the markets have recovered most of their Q4 2018 -14% loss and are heading towards the break-even point. Our Trend Tracking Indexes (TTIs) have greatly improved and are within striking distance of an upside break of their long-term trend lines. As of today, the Domestic TTI will need to gain an additional 1.96% before a new “Buy” signal will be generated.

However, I would not be surprised to see a pullback developing next week. After all, markets don’t go up forever in a straight line, which they have so far this year, so we are way overdue for a correction.

The markets will be closed on Monday to due to the Martin Luther King holiday.

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 01/17/2019

ETF Data updated through Thursday, January 17, 2019

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.

  1. 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: SELL — since 11/15/2018

Click on chart to enlarge

Our main directional indicator, the Domestic Trend Tracking Index (TTI-green line in the above chart) is now positioned below its long-term trend line (red) by -3.42% after having generated a new Domestic “Sell” signal effective 11/15/18 as posted.

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Following The Rumor

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

If markets appear stuck and non-directional, simply start a bullish rumor to get things moving again. Such was the case today when the major indexes, after hovering tightly around their unchanged lines for most of the session (weak bank earnings), took off and headed higher.

The support came from a report alleging that the Trump administration was debating whether to “ease tariffs on Chinese imports” in order to ease tensions and calm markets in view of the ongoing partial government shutdown. The result was an instant spike in the major indexes (see chart above), which was faded as the rumor was denied, but the “rumor” idea worked, and we closed in the green.

The other highly anticipated news item was Netflix’s after hour earnings report. Leading up to it, the stock was pushed higher in part of yesterday’s announcement of an increase in subscription rates. After publishing their report card, the stock sank some 3% (as of this writing) due to the revenue missing expectations. It remains to be seen if there are any negative consequences for the Nasdaq tomorrow.

Bond yields popped and advanced with the 10-year making new highs for 2019. That came as a surprise, as there was no news supporting such a move. While we only reached the 2.75% level, any further moves towards 3% is bound to take some steam out of current bullishness. Is that why some analysts seem to think that we are due for a market correction starting next week?

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Getting to Know The Real Market Catalyst

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The Dow was leading today’s modest advance after having been the laggard yesterday. Some positive earnings from financial powerhouses Goldman Sachs and BofA gave the assist, while uncertainty over the partial government shut down was on traders’ minds but did not affect market direction.

You may be wondering what the real catalyst was that generated and propelled the post-Christmas rally other than President Trump declaring to “buy the dip.” Despite weak economic data points and the Smart Money exiting stocks, we’ve seen sharp swings higher helping the buy-and-hold crowd to reduce the Q4 2018 losses.

ZH shed some light on this phenomenon via their comment “it’s not the economy, it’s the central banks, stupid,” and added this for clarification:

Q4 2018 saw global stock markets finally wake up to the fact that the world’s central banks were withdrawing liquidity and played catch-down to an ugly tightening reality. December’s contagion to American stocks was the final straw for the world’s elites however  and after the Mnuchin Massacre, it appears the Plunge Protection was ordered back into battle and as the chart below shows – central bank balance sheets suddenly started to grow – aggressively so… and that is what is dragging stocks higher, squeezing shorts at an unprecedented pace, and economically irrationally levitating P/Es despite a wall of uncertainty ahead.

This chart makes the above abundantly clear. As you can see in the circle on the right, Central Banks’ (CBs) balance sheets suddenly grew sharply (asset purchases) pulling global stocks out of the doldrums. The exact opposite happened when balance sheets were normalized, demonstrated by the drop starting in late September.

Just like in 2018, 2017, and 2016, the start of the year has prompted a resurgence in the size of global central bank balance sheets… and just like in 2018, 2017, and 2016, global stocks (with US being the most liquid attractor of that flow) are soaring

And just remember, The ECB is supposed to be tapering, The Fed is still on ‘autopilot’ for now, and The BoJ is being forced to taper its buying size…

And finalizing with:

So, the simple lesson once again is – watch what they do, not what they say!!

While this is only one man’s opinion, it sure explains the irrational exuberance created in the marketplace out of nowhere and with lightening speed.

For us trend trackers the only question is this one: Manipulation or not, will this rebound have enough staying power to push our Trend Tracking Indexes (TTIs) back into “Buy” mode?

As always, no one has the answer, so we’ll to wait for this event to happen. As of today, our Domestic TTI is -4.32% away from a new “Buy” signal.

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