ETFs On The Cutline – Updated Through 09/20/2019

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 259 (last week 270) 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 September 20, 2019

ETF Tracker StatSheet          

You can view the latest version here.

ENDING ON A WEAK NOTE

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

An early upturn hit the skids after a report that a Chinese delegation had canceled plans to visit farms in Montana, as part of negotiations designed to sell more farming products. Helping the positive tone early on was news that Trump was exempting hundreds of Chinese products from tariffs.

Things fell apart when it became known that Trump wanted a “complete” deal and not just a temporary agreement to promote U.S. agricultural goods. The trade mood went from bad to worse when he then added that he “does not need a China deal before the election,” causing the Trade Deal odds to tumble.

Even the Fed, with its current battle to control the greatest liquidity crisis in overnight repos in over a decade, seems to be confused, as two of its talking heads offered opposing opinions, according to ZH:

  • Bullard: Recession straight ahead!
  • Rosengren: Bubbles ready to burst!

So, which is it?

That kind of split within the Fed makes me realize that there are no certainties in the current market environment. That’s why it remains to be of great importance to have an exit strategy in place, so we don’t get caught on the wrong side, should things fall apart.

For the week, the major indexes slipped and so did bond yields, which came off their recent highs with the 10-year dropping from 1.9% to 1.73%, as this chart shows.

We’ll have to wait and see if this softening of bond yields is a sign of more to come, which should help equities to move out of this week’s doldrums.

On the other hand, the Fed’s emergency liquidity measures in the overnight lending market, if not resolved satisfactorily, could extract a pound of flesh from equities when trading resumes next week.

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 09/19/2019

ETF Data updated through Thursday, September 19, 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.

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 02/13/2019

Click on chart to enlarge

Our main directional indicator, the Domestic Trend Tracking Index (TTI-green line in the above chart) is now positioned above its long-term trend line (red) by +5.74% after having generated a new Domestic “Buy” signal effective 2/13/19 as posted.

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Slipping And Sliding Into The Close

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Yesterday’s “feel good” closing ramp carried over into today’s opening, as the major indexes were getting close to test new record highs. Better-than-expected housing and manufacturing data contribute to the bullish sentiment.

While the S&P 500 is within 1% of its record closing high, it may not get there until next week due to tomorrow’s quadruple witching day for the US markets. That means volatility may spike as a result of the simultaneous quarterly expiration of futures, options on indexes and stocks.

Yesterday, I mentioned the liquidity crunch in the overnight lending market. It continued today with the Fed promising billions of dollars to “support” the system from blowing out of control. The liquidity shortfall rose by almost $4 billion compared to Wednesday morning. Ouch!

We saw some fallout of that, as the markets skidded, assisted by odds of a China trade deal slipping, with news hitting the headlines that the White House favors increasing some tariffs to possibly 50% or even 100%. That took the starch out of upward momentum, and we ended up just about unchanged.

Traders are still digesting the Fed’s rate cut, and we may not see any attempt to break through to all-time highs until next week, although that July 2019 high may very well serve as overhead resistance.

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Fed Delivers Rate Cut—Stocks Fall—But Jump Into The Close

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

As expected, the Fed delivered the goods and cut rates by 0.25%; but stocks sold off. The reason was that the accompanying language in its statement and economic projections cast doubt not only on another rate cut this year but also in 2020. That was a disappointment for traders, who had firmly believed that at least one more reduction prior to December 11 was a sure thing.

However, the sell-off was mild, and we saw another last hour pump to get the indexes to a green close, which worked except for the Nasdaq. In the end, not much was lost or gained, as we ended up hugging the unchanged line.

What was not addressed was the liquidity crunch in the overnight lending market, where the Fed had to step in and provide some $75 billion in liquidity as the Secured Overnight Financing Index (SOFI) spiked to 5.25% from 2.25%. This was the Fed’s first intervention in over 10 years.

These are complicated repo transactions, which can have a dire effect on equities but have not been reported by MSM. If this topic interests you, you can read more here and here. I am merely pointing this out as a fact that has been conveniently ignored by the markets but may come back to haunt them.

The last hour rebound was a function of Fed head Powell promising more Quantitative Easing (QE) by disguising his words like this:

It is certainly a possibility that we’ll need to resume the organic growth of the balance sheet sooner than we thought.

What that means is that QE is on its way, at some point, but stocks managed to joyfully jump into the close with the S&P 500 reclaiming its recently lost 3k milestone marker.

The Fed did exactly what was expected, but it remains to be seen if this will be enough for equities to continue climbing the mountain towards new all-time highs.

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Markets Hold Steady Ahead Of The Fed’s Verdict On Interest Rates

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

It was a matter of treading water for most of the day, with the major indexes limping around their respective unchanged lines, until a last-minute pump pushed the indices up and into a green close.

Mid-day attempts to get a rally going fell short, as weakness in the energy sector, due to reports that Saudi Arabia may recover sooner than expected, pulled oil off its lofty level. According to Reuters, Saudi Arabia will restore 70% of the 5.7 million barrels a day production lost rather quickly and the balance within the next two to three weeks.

If so, yesterday’s crude oil spike will turn out to be an outlier with no consequences to equity markets. Traders seemed to share that view and quickly focused their attention on the Fed and expectations that they would reduce interest rates when they meet tomorrow.

It is a foregone conclusion that a -0.25% ease is priced in the market, although the whisper number of -0.5% is still making the rounds. One thing is for sure, if the Fed does not deliver a rate cut, equities will sell off sharply. Remember, these markets are like a drug addict that does not function very well without a regular dose of stimulus.

ZH summed it up this way:

Tomorrow’s rate cut will come with full employment, surging inflation, record high stock prices, and near record low interest rates.

Makes me want to go “Hmmm.”

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