Riding The Bucking Bronco

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

A bucking bronco type of market behavior seemed to be perfectly complementing this election day with its own ups and downs, irregularities, and accusations.

The major indexes stormed out of the gate and ripped higher with the Dow at one point sporting a 500-point gain, which collapsed, as the index almost broke below its unchanged line. However, bullish momentum reappeared, and all the majors managed to score a green close.

The initial ramp was based on traders’ hopes that in case the Republicans take back the House, a gridlock in Washington would be the result, a scenario which is viewed as a positive because, with a divided Congress and President, government spending, new taxes and regulations will be limited. At least, that’s the theory.

The US Dollar plunged to 7-week lows and, as ZeroHedge pointed out, is its biggest 3-day dive since March 2020. As one analyst noted, “it’s been the dollar’s demise that has been driving this bounce in stocks…”

The beneficiary was gold, as the precious metal spiked +2.13% to over $1,700, which represents a 5-week high. Also giving an assist to stocks were declining bond yields, as market expectations for Fed rate trajectories changed from hawkish to dovish today.

Should market election probabilities not be met, we will see this bear market rally hit the skids, which it may do anyway, should Thursday’s CPI report confirm that we have not yet hit peak inflation.

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Bouncing Into Election Day

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The markets shrugged off a supply warning from Apple and extended Friday’s bounce into a week that could present unexpected surprises. The obvious one is tomorrow’s mid-term elections, the outcome of which could very well affect the direction of future spending as well as create a political gridlock.

Any kind of stalemate is viewed as a positive for equities, as no new spending plans would be a good outcome for interest rates. However, Thursday’s CPI report, if it comes in higher than expected, will dash any hopes for the bulls and those betting on a Powell “pause” or “pivot,” with a sell-off being a likely possibility.

Today’s markets started with a sideways meandering of the indexes, which ZeroHedge described like this:

Markets oscillated quietly ahead of the midterms, then at around 1345ET – with absolutely no headline catalyst – a wave of buying suddenly hit every US index, lifting everything comfortably green on the day…

Makes you wonder if the Plunge Protection Team (PPT) had anything got do with it in order to create a positive background, since all other assets dropped on the day. If so, that action was perfectly in sync with an aggressive short squeeze.

Bond yields rallied mid-day, as the 10-year solidified its position above the much-fought over 4% level by closing at 4.22%, which was up by almost 10bps. The US Dollar slumped again, but gold was not able to take advantage of it, and the precious metals went sideways.

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ETFs On The Cutline – Updated Through 11/04/2022

Ulli ETFs on the Cutline Contact

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 312 High Volume ETFs, defined as those with an average daily volume of more than $5 million, of which currently 44 (last week 43) 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 Newsletter For November 4, 2022

Ulli ETF Tracker Contact

ETF Tracker StatSheet          

You can view the latest version here.

WINNING FOR THE DAY BUT LOSING FOR THE WEEK

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

It was chaotic session indeed, as the Dow jumped to an early 500-point gain, only to see it evaporate in no time, with the index diving into the red, before dip buyers pulled equities back above their respective unchanged lines to a solid green close. However, for the week, the Dow snapped its four-week win streak.

ZeroHedge summed up the day’s news like this:

  • Good: payrolls beat expectations (tightening not working – bad for stocks)
  • Bad: wage growth slowed modestly (less-flation – good for stocks?), full-time workers dropped 490k (economic weakness – not good for stocks)
  • Ugly: number of unemployed Americans highest since Feb (recession reality – bad for stocks)

October’s nonfarm payrolls surprised to the upside with the Labor market saying that 261k jobs were added, as the unemployment rate rose to 3.7%. Traders viewed today’s numbers as a mixed picture, yet the idea that a cooldown in the Labor market, with the economy not tanking, was seen as a positive. However, the addition of 261k jobs may also keep the Fed’s policy of continued rate hikes on schedule, thereby pushing the much hoped-for pause or pivot on the back burner.

For the week, the Nasdaq was the biggest loser, down around 6%, the S&P 500 gave back 2.6%, while the Dow fared the best with only a 1.5% loss. Tech stocks gagged some 8%, but energy was the winner with a 2.4% gain.

While bond yields had a mixed day, they stormed higher for the week with the 10-year solidly closing above its much-fought over 4% level (4.166%). The US Dollar took a massive dive today (almost 2%), but for the week the currency closed about unchanged.

Gold benefitted, captured a solid +3.3% gain on the day and reached its highest point in 3 weeks, while Crude Oil followed suit but climbed to a 3-month high.

Fireworks could be on deck next week, as mid-term elections, and the latest CPI report, will both be able to affect future market direction.  

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 11/03/2022

Ulli ETF StatSheet Contact

ETF Data updated through Thursday, November 3, 2022

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 12% 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. Here too, I recommend trailing sell stop of 12%, or less, 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: SELL — since 02/24/2022

Click on chart to enlarge

Our main directional indicator, the Domestic Trend Tracking Index (TTI-green line in the above chart) has broken below its long-term trend line (red) by -5.54% and remains in “SELL” mode.  

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Fed Signals More Rate Hikes On Deck—Markets Tank

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Despite the Fed doing the expected, namely hiking rates another 75bps and hinting at a policy change in the future, eliciting bullish momentum at first, things went the opposite way after Powell suggested that “the ultimate level of interest rates will be higher than previously expected.”

The overall tone of the FOMC statement was hawkish, which translates into the Fed needing more time to fight inflation with no hints of dovishness that a pause could be a possibility in the future. And just like that, the early feel-good bounce was wiped out, and south we went, with the major indexes diving into the close.

Among a host of comments by Powell, this one left no doubt as to how he sees the current economic environment:

The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive.

The immediate effect was that Terminal Rate Expectations surged further into hawkish territory, with Rate Cut Expectations following the same path, as the odds for further hikes increased. As a result, SmallCaps and the Nasdaq puked over 3%, as ZeroHedge pointed out.

And then this:

*POWELL: IF WE OVERTIGHTEN, WE CAN SUPPORT ECONOMIC ACTIVITY

*POWELL: IF WE UNDERTIGHTEN, RISK IS INFLATION ENTRENCHED

That should make it clear that a pause, let alone a pivot, is nowhere near on the horizon, which begs this question:

Will the October rally now turn into another dead-cat-bounce?

We will find out soon.

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