Markets Continue The Path Of Least Resistance—Down

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

For those hoping for a turnaround Tuesday, it did not happen, as virus headwinds continued to spread around the world. An early rebound proved to be meaningless with the downward trend remaining intact.

Internationally, it was worse than domestically, with our International TTI diving below its long-term trend line by a margin large enough to generate a “Sell” signal for that arena. Please see section 3 for details.

Market sentiment was mixed, as dip buyers try to step in to prop up the indexes, but volume was not heavy enough to accomplish anything other than a temporary halt in the downward swing.

After Monday’s drubbing, traders expected a bounce back, or at least a pause in downward momentum, but the tumble continued unabated. Of course, investor complacency, caused by the Fed’s support policy of the markets, has many in shock, as realization set in that markets can go down, and that corrections of 5-10% are a perfectly normal occurrence.

Not helping the mood were some economic news showing that the Fed Business Survey crashed in February with new orders collapsing, while Subprime Credit Card Delinquencies spiked to record highs and surpassed the financial-crisis peak.

The S&P 500 price of 3,200 was considered by some analysts a crucial support level and, once broken, could lead to higher volatility and more downside risk, in the -10% area. Well, the level did not put up any fight, and the index sliced right through it closing the session at 3,130.

As a result, our Domestic TTI, the main directional indicator, headed south as well and has now reached a point that is within striking distance of a “Sell” signal. As you can see in section 3 below, we are currently only 0.35% away from this event becoming reality.

If it does, and the trendline is clearly pierced to the downside, we will move out of the markets and to the safety of the sidelines, as the odds of this turning into a full-blown bear market will have increased.

Fed vice-chair Clarida did not help matters by saying:

US economy and monetary policy are in a good place, noting that it is still too soon to speculate on whether the coronavirus will lead to a material change in US economic outlook.

Despite a temporary pause in the drop, while Clarida was talking, downward momentum picked up again, as it became clear that there were no solutions or promises forthcoming. Interestingly, the chart I posted last week, proved to be an accurate prognosticator, as the S&P 500 finally caught down to global liquidity.

In my advisor practice, we will start liquidating some of those positions, whose trailing sell stops were triggered, and will prepare for an all-out domestic “Sell” signal.

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Coronavirus Infects Markets

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

World markets joined in unison by selling off with weekend news about the coronavirus continuing worries that global economies will not escape unscathed and take a hit of unknown proportions.

Sure, news media and markets tend to overreact, but the negative virus effects can’t be denied, as the struggle with containment policies and massive unknowns seem to get worse.

It’s no surprise that markets are feeling nervous this morning, given the known facts, which analyst Bill Blain summarized as follows:

The economic damage in terms of cancelled tourist trips to Asia and vice-versa, empty container ships, global supply chain breakdown shuttering factories across the globe, commodities tumbling, raising fears of mass defaults as just-in-time manufacturers fail to make interest payments is clear.

He went on to elaborate:

This crisis comes at the top of massive bubbles in stocks and bonds, fueled by 10-years of accommodative monetary experimentation – just at a time when the global monetary authorities are increasingly understanding the urgent need undo the unintended negative consequences, end QE, to normalize interest rates and take the pressure out of asset bubbles.

Forget about normalizing interest rates, it will be the opposite with bond yields crashing this morning, as the 10-year dropped some 10 basis points to below 1.40%. Considering the above, I believe the Central Banks will go all out and provide further “accommodative” policy support meaning yields will be heading towards the zero bound, as is the case in many developed countries.

As ZH points out in the above chart, a break below this “tipping point,” increases the probability to more than 50% of the Fed cutting back rates to 0%.

Along those lines, we may very well witness a well-known mantra come into play, set in motion by former ECB president Draghi, for the Fed to do “whatever it takes” to avoid an economic breakdown.

In the end, for us trend trackers, the only things that matter are: Is the major trend is still intact and/or have any sell stops been triggered?

For right now, the answer to both is no (see section 3 below), so we will continue to hold until either one of these two conditions come into play.

Despite today’s snapping of complacency, it’s also noteworthy that the S&P 500 closed today at the same price it had when the month of February started and remains within 5% of its all-time highs.

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ETFs On The Cutline – Updated Through 02/21/2020

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 272 (last week 279) 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 February 21, 2020

ETF Tracker StatSheet          

You can view the latest version here.

SLIDING INTO THE WEEKEND

[Chart courtesy of MarketWatch.com]

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More downside momentum emerged this morning, as the coronavirus fallout continues with traders finally realizing that consumer and producer sentiment has been crippled, and that even the almighty the Fed can’t just simply reboot things by printing a few trillion dollars.

Virus cases are rebounding in China and soaring in South Korea, as the flow of assets into safe havens, like gold and bonds, pulled equities off their lofty levels. Despite this being the worst down week in four, the pullback has been modest, so far.

But, as manufacturing data from around the world comes in, worries about slower economic growth, or in some cases no growth, may continue to weigh on equity markets. Hence the flight into gold and bonds, with the 30-year bond yield now scoring an all-time record low of 1.89%. Sounds like something is amiss when considering that at the same time, equities are less than 1% off record highs.

It’s clear that a supply chain disruption is a sure thing and will affect the U.S. as well, with the first indication being the PMI manufacturing index, which has collapsed into contraction.

Still, the damage for the week was relatively minor with the S&P 500 and Nasdaq surrendering -1.3% and -1.7% respectively.

So far, the major trends remain intact, and none of our trailing sell stops are close to being triggered. However, what happens if the powers to be will not reopen the liquidity spigot, as Bloomberg demonstrates in this chart?

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 02/20/2020

ETF Data updated through Thursday, February 20, 2020

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 +8.45% after having generated a new Domestic “Buy” signal effective 2/13/19 as posted.

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Comeback Wednesday

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

With the effects of the coronavirus on everyone’s mind, China felt obliged to assure the world that it will take measures to help virus-stricken businesses by identifying weak links in supply chains. That was enough to get a rebound started with the S&P 500 and Nasdaq promptly scoring new intra-day all-time highs.

At the same time, the Chinese claimed that the rate of new cases has allegedly started to slow down creating optimism that the much-feared trade and travel disruptions may not be as bad as assumed, but the WHO still has recommended caution.

Helping the rebound was the release of the Fed’s minutes indicating that officials think that the economy appeared stronger in late January than had been expected. As a result, interest rates were kept unchanged, although concerns were voiced about the threat of the coronavirus, not just in China but globally as well.

Looking at the big picture, domestic equities have kept their bullish trend intact this month, on one hand helped by positive earnings reports while, on the other, being neutralized a tad as global growth has slowed due to the effects of the virus, the full impact of which is still to be felt.

However, right now, the bullish theme continues unabated.

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