[Chart courtesy of MarketWatch.com]

1. Moving the markets

After the “mini trade” deal faded yesterday, today’s news brought into question whether anything was accomplished. Chinese officials essentially confirmed that the progress on the “phase 1” deal may have been a sham.

Beijing will make good on the $50 billion of annual agricultural purchases, but only if Washington agrees to remove all the trade war tariffs. On the other hand, Trump has made it clear that the tariffs must remain in place until a deal has been implemented with the Chinese proving that they are abiding by the rules.

While the futures markets slumped on the news, this was quickly forgotten as the computer algos jumped on the earnings bandwagon with traders cheering a bunch of ‘not really’ upbeat corporate earnings reports thereby pushing the “phase 1” trade deal on the back burner. Also throwing in a temporary assist to the bulls were news of an alleged breakthrough of the always changing Brexit negotiations.

In the meantime, the Fed’s overnight Repo operations to provide liquidity to banks surged to nearly $90 billion, which means the initial problem I posted about is anything but transitory and will eventually affect stock markets. The question in my mind is not “if” but “when.”

Despite best efforts, the S&P 500 fell short of reclaiming its psychologically important 3,000 level. It may break through it, but it will then face stiff overhead resistance at the high end of the trading range at around 3,022. If we get there, the index may very well turn around again to close its October break-away gap (blue) before possibly starting another rally attempt.

ZH summed up the rally-on-no-news like this:

China (negatively) snubbed Trump’s trade deal overnight, demanding tariffs removed before Ag buy.

China (negatively) saw CPI surge, somewhat reducing option of brad-based stimulus

Brexit (positively) was reported as being closer to becoming a deal.

Fed Repo bailout (negatively) surged to its highest since September.

Tariffs (positively) did not get implemented today (which is, of course, old news).

Earnings (negatively) signaled ugliness persists for GS and WFC.

Earnings (positively) beat (with UNH, JPM and JNJ helping support The Dow).

IMF (negatively) downgraded global growth to weakest since Lehman.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

After 1-1/2 years of trade negotiations, last Friday’s “mini-deal,” if you can even call it that, cast some more doubt on the substance of what was accomplished. The words “deal” or “substantial” just don’t fit the picture of what some analysts have called nothing more than a “farm package.”

China has agreed to increase its purchases of US farm products up to $40 to $50 billion with no time limit attached, while the U.S. postponed planned increases in tariffs. That was the entire story upon which the computer algos went crazy and drove the Dow up over 300 points.

While today’s lackluster session was as much a function of the bond markets being closed for Columbus Day, a big contributor to the lack of buying was the general perception that the “phase 1” China deal will not improve trade barriers nor encourage economic growth any time soon.

Not helping matters was a report from Morgan Stanley calling last Friday’s close to be the high for stocks with selling now being on deck, as they see the trade truce to be disappointing and a boon for the bears.

However, markets could break in either direction, if you look at this updated chart from Bloomberg, which makes the case that, based on history, we could see a repeat of 1987 or 2013. If the perceived accuracy of this chart continues, we will find out the answer real soon.

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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 224 (last week 226) 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.      

ETF Tracker StatSheet          

You can view the latest version here.

A WAVE OF TRADE OPTIMISM SPEADS ACROSS MARKETS

[Chart courtesy of MarketWatch.com]

1. Moving the markets

A sea of green spread across global markets, as trade war gloom turned into euphoria on nothing but optimism that a “skinny, lite or mini” deal between the U.S. and China would be announced momentarily.

Futures jumped and that feel-good momentum carried over into the regular session with Trump calling the first day of trade talks with China in over two months “very, very good.”

Another assist came overnight from a Chinese state newspaper saying that a “partial” deal would benefit both parties and suggested that Washington should take the offer on the table.

Then Vice Premier Liu He, the chief negotiator, chimed in that the “Chinese came with great sincerity” while adding that “not only would it be of tangible benefit by breaking the impasse, but it would also create badly needed breathing space for both sides to reflect on the bigger picture.”

In the end, Trump said that the U.S. has reached a “substantial” phase one deal with China, along with a “partial” trade agreement that could “help lead to a truce and lay the groundwork for a broader deal.”

These mostly meaningless words hit the newswire just prior to the markets closing, and the Dow sold off quickly by 200 points, but nonetheless, it was a good day for the major indexes. Due to rising interest rates, the low volatility ETF SPLV lagged SPY but remains ahead by a wide margin for this current ‘Buy’ cycle (+12.81% vs. +7.73%).

Pretty much out of nowhere, and subdued by trade talk taking front and center, was the Fed’s totally unexpected announcement of Quantitative Easing (QE), which they insisted is “Not a QE.”

Well, if it walks like a duck and quacks like a duck, odds are high that is a duck. The Fed will start buying up to $60 billion in T-Bills per month starting next week. ZH summed it up succinctly:

But wait there’s more, because just as today’s surprising spike in repo use suggested, mere “NOT A QE” may not cut it, and just in case, in order to provide an “ample supply of reserves”, the Fed will continue with $75BN in overnight repos and $35 billion in term repos twice per week, “at least through January of next year.”

To me, this is nothing but a bank bailout in disguise. I have opined on the “financial plumbing” issues in the overnight repo market, which had calmed down over the past couple of days. Today’s spike in demand may have been the trigger for the Fed to act, which some analysts had forecast not until November.

The markets totally ignored this development, but I believe there will be a fallout reaction by equities—possibly sooner rather than later. We may find out as soon as next week, unless the trade enthusiasm continues with full force to take front and center.

However, when looking at the global picture, it’s liquidity that provides the fuel to power markets, as this chart clearly demonstrates. At the same time, the comparison to the events of 1987 are striking. Could this really happen again?

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ETF Data updated through Thursday, October 10, 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 +1.25% after having generated a new Domestic “Buy” signal effective 2/13/19 as posted.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

Well, it sure didn’t take much effort to keep the markets going, as Trump successfully dangled the trade carrot again via this tweet:

“Big day of negotiations with China. They want to make a deal, but do I? I meet with the Vice Premier tomorrow at The White House.”

While this did not indicate really anything, the computer algos saw it as a positive, since China’s chief trade negotiator Vice Premier Liu He is staying in town till Friday, at least for now. That was all it took to ramp the markets higher in a vain attempt to get back to even for the week.

However, a US-China deal is based on nothing but hope, because as ZH noted correctly:

“The US has not changed its extensive and rigorous requests for China, nor has it responded to China’s core concerns,” Renmin University international relations professor Shi Yinhong said.

“Even if there is a deal, it could only be a mini-deal, even a minimal mini-deal. A currency pact, if true, does not bring any substance.”

But optimism is all that matters, so we’ll have to wait and see how this movie plays out. Given recent history, this could very well turn into another head fake.

In the meantime, the major indexes managed to whipsaw around above their respective unchanged lines and scored another winning session for the second day in row, which was in part supported by a short squeeze in SmallCaps.

Still, the S&P 500 needs to gain about 1.3% from today’s level in order to reach last Friday’s close.

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