Trade Tensions Heat Up — Markets Head Down

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The trade war rhetoric between the U.S. and China heated up over the weekend, with both sides threatening a variety of consequences. The major indexes headed south with the Nasdaq taking the brunt of the losses.

Chipmakers took it on the chin, as U.S. tech companies, in compliance with White House requests, have begun to implement the ban on Huawei Technology products. The company will be cut off from receiving Android updates and will be restricted to use only public open-source versions of the software program.

AAPL stock fell after warnings of retaliatory action from China, which plays a big role in how Chinese consumers perceive U.S. products, and “acceleration” to adopt local iPhone substitutes could be damaging to say the least.

To further put the heat on the U.S., China’s Xi threatened to use one of their nuclear options, namely banning Rare-Earth mineral exports, which for sure would cripple supply chains of these rare commodities necessary in all tech products and military applications.

In other words, the tit-for-tat continues with no end in sight, and it appears that trade differences are about to morph into an all-out trade war. That will not be a positive for equity markets, unless the bizarre theme of the past that “bad news is good news” still makes its presents felt.

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ETFs On The Cutline – Updated Through 05/17/2019

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 221 (last week 245) 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 May 17, 2019

ETF Tracker StatSheet          

You can view the latest version here.

ENDING THE WEEK ON A SOUR NOTE

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The struggle for direction shifted into high gear when, after a weak opening, the algos pushed the indexes back into the green, only to see the gains disappear in a sudden late session sell off. In between, the S&P 500 vacillated tightly around its unchanged line.

ZH described the cause of the early dump and the late slump very concisely:

…the reason why futures slumped overnight is because Chinese officials turned up the trade war rhetoric, warning that there are no plans for another round of talks. Additionally, front page commentary in the Communist Party’s People’s Daily evoked the patriotic spirit of past wars, saying the trade war would never bring China down, while commentary on the blog Taoran Notes, which was carried by state-run Xinhua, accused the U.S. of “playing tricks to disrupt the atmosphere.”

The message was clear: no talks are scheduled, and more importantly, China has no urge to schedule talks in the immediate future or to engage the “barbarian” Trump.

And so, with exactly one hour in trading left, CNBC doubled down, reporting what traders already knew thanks to the latest round of belligerent Chinese rhetoric, namely that “negotiations between the US and China appear to have stalled as both sides dig in after disagreement earlier this month.” Additionally, CNBC also echoed what Chinese officials had already said, and citing two sources briefed on the status of the talks, said that scheduling for the next round of negotiations is “in flux” because it is unclear what the two sides would negotiate.

Finally, pointing out the obvious, CNBC notes that “China has not signaled it is willing to revisit past promises on which it reneged earlier this month, despite showing up for talks in Washington last week.”

The market reaction was instantaneous and negative, sending the S&P sharply lower… and yet prompting questions: why is the market sharply lower on “news” which everyone already knew? Perhaps the biggest question is just what idiot is the marginal price setter in a market, in which nearly day-old news can hammer stocks not once but twice, and linked to that, just how dumb are the algos?

As a result, the Dow is down four weeks in a row, something we have not seen since May 2016. Also, the mid-week short-squeeze ran out of juice today causing the major indexes to end this week on a sour note.

With the U.S.-China trade talks having collapsed, a new driver is needed to prop up the markets next week. Otherwise, the downside may come into play again and, as I posted before, collapsing global money supply will currently not be of any assistance to the bullish theme.

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 05/16/2019

ETF Data updated through Thursday, May 16, 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 +3.86% after having generated a new Domestic “Buy” signal effective 2/13/19 as posted.

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Notching A Third Day Of Gains

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

A third day of gains kept the bulls in charge with the major indexes ending up solidly in the green, as it turned out that a worsening global trade picture is now considered a good thing for equities. Go figure…

To be fair, an early assist came from a couple of blue-chip stocks, whose upbeat earnings helped to get things started in the bullish direction. Also, U.S. Labor and Housing market numbers were better than expected, all of which alleviated some of the ever-present worries over trade escalations.

Conveniently ignored was the decoupling of stocks and bonds, which headed in different directions but will have to eventually fall back in sync. The question is: “will it be in favor of stocks or bonds?

If you think that traders have a handle on what goes on in the markets, you may be pleased to hear that this is not the case. Here are some nuggets I’ve found when evaluating if we are in a ‘risk on’ or ‘risk off’ mode:

Trade tensions have eased. Trade tensions have ratcheted up.

Things will get better. They have to. It’ll get worse before it gets better. Neither side can afford to back down.

Use game theory to figure this whole situation out. Use it to create a game plan.

React to every comment. It’s the only way to survive.

Buy the dip. Derisk.

And, of course, what is really the punchline: The global economy is set to grow and is in a “good place;” the numbers are cratering fast.

Which is it?

One trader added this bon mot: Nobody know what’s going on, but everyone is buying just in case.

There you have it. It appears to be a mad house with everyone scrambling for explanations, which would be funny, if this whole environment wouldn’t be so critical for the survival of your portfolio.

I think the only reasonable thing to do is to have a clearly defined exit strategy, just in case this house of cards comes crumbling down, which it eventually will.  

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Trade Hope Keeps Rally Alive

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

A market opening in the red turned into a positive, as trade hope was kept alive on that other trade war front, namely Europe. We heard that an unexpected bit of good news spread like wildfire when Trump announced that he plans to delay imposing tariffs on EU auto imports by six months.

That was good enough to change the mood on Wall Street to bullish, as it meant at least a temporary trade-ceasefire on one front, while the escalation with China could continue and morph into an outright trade war.

Domestically, retailers are seeing declining purchases for the second time in 3 months. This means consumer spending confirms a slowing economy, despite the widely touted low unemployment rate, which is supposed to represent a healthy labor market.

This weakness goes along with global data, which showed disappointment, as the Global surprise index kept heading south, which makes the current rally questionable as to whether it sits on a solid footing or is merely based on wishful thinking along with hope for more stimulus.

Thanks to ZH, we now have an updated chart showing that global money supply and fundamentals, as represented by the Citi Economic Surprise Index, are no longer supporting equities. We’ll have to wait and see ‘if’ and ‘when’ that reality sinks in. 

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