Snap-Back Rally Propels Equities Higher

Ulli Market Commentary 2 Comments

[Chart courtesy of MarketWatch.com]
  1. Moving the markets

The much feared wave of selling that dominated last week came to a sudden end when the major indexes opened higher, pulled back slightly and then rocketed into the close thereby recording their largest one-day percentage gains since the middle of 2015. The bulls finally showed signs of life supported by reports that behind the scenes talks between the US and China, to avoid a global trade war, showed some promise.

Technically speaking, today’s rebound was a repeat of the one we saw on February 8 when the S&P 500 bounced off its 200-day M/A, which was exactly what happened today. So, today’s market action can be just as much attributed to technical factors as the trade talk rumors.

Nevertheless, today’s recovery wiped out just about half of the losses sustained last week. As I mentioned in Friday’s post, the “Sell” signal generated by the International TTI would be subject to this morning’s market behavior. This what I said:

Today’s action sent our Trend Tracking Indexes (TTIs) much lower (see section 3), and we have a split picture. While the Domestic one remains in bullish territory by +0.83%, the International one has breached its long-term trend line to the downside by -0.45%, which means a “Sell” signal for this arena has been generated and all broadly diversified international ETFs should be sold.

They way I do this in my advisor practice is that I will first observe the markets on Monday morning to see if a rebound is in the making. If there is, I will hold off with my liquidation plans. If the markets, however, show continued weakness, I will follow through and sell those ETFs that are affected.

Needless to say, the rebound was in the making, and I held off with my liquidations plans for the time being. They will be revisited once the TTI drops back below its long-term moving average.

Green was the dominant color of the day, and all of our current ETF holdings rallied to varying degrees. Heading the group were Semiconductors (SMH +3.98%), Emerging Markets (SCHE +3.24%) and Financials (XLF +3.24%).

Interest rates moved up with the 10-year bond yield gaining 3 basis points to 2.85%, while the US Dollar (UUP) took a dive and lost -0.47%.

While today’s rebound was certainly welcome after last week’s drubbing, it’s far from certain whether this is another dead cat bounce, that will come back down to test the S&P’s 200-day M/A again, or an attempt to take out the all-time highs. We have to be prepared to deal with either possibility where the latter requires no action on our part while the former might bring another “Sell” signal into play.

  1. ETFs in the Spotlight

In case you missed the announcement and description of this section, you can read it here again.

It features 10 broadly diversified and sector ETFs from my HighVolume list as posted every Saturday. Furthermore, they are screened for the lowest MaxDD% number meaning they have been showing better resistance to temporary sell offs than all others over the past year.

The below table simply demonstrates the magnitude with which some of the ETFs are fluctuating in regards to their positions above or below their respective individual trend lines (%M/A). A break below, represented by a negative number, shows weakness, while a break above, represented by a positive percentage, shows strength.

For hundreds of ETF choices, be sure to reference Thursday’s StatSheet.

Year to date, here’s how our candidates have fared so far:

Again, the %M/A column above shows the position of the various ETFs in relation to their respective long term trend lines, while the trailing sell stops are being tracked in the “Off High” column. The “Action” column will signal a “Sell” once the -7.5% point has been taken out in the “Off High” column.

  1. Trend Tracking Indexes (TTIs)

Our Trend Tracking Indexes (TTIs) recovered during today’s snap-back rally, and both are positioned in bullish territory.

Here’s how we closed 3/26/2018:

Domestic TTI: +1.89% above its M/A (last close +0.83%)—Buy signal effective 4/4/2016

International TTI: +1.36% above its M/A (last close -0.45%)—Buy signal effective 7/19/2016

Disclosure: I am obliged to inform you that I, as well as my advisory clients, own some of the ETFs listed in the above table. Furthermore, they do not represent a specific investment recommendation for you, they merely show which ETFs from the universe I track are falling within the guidelines specified.

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Comments 2

  1. Hey, Uli

    I see you’re back to using the term, “dead cat bounce” with every rally. Perhaps you have a different definition from mine. I think it means “a temporary recovery in share prices after a substantial fall, caused by speculators buying in order to cover their positions.” You may have another definition, since you seem to be so quick to label market rallies as such. Clarify for us?

  2. Smokey,

    Your definition is correct. This is exactly what occurred on Feb 8th, when the markets tanked, then rallied sharply only to fall apart last week when the S&P 500 revisited its 200-day M/A. We’ll have to wait and see if yesterday’s bounce will be a repeat of February’s action. Please note that sometimes a dead cat bounce can occur with far less magnitude and more frequency than the one describe above.

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