An early morning ramp-a-thon pushed equities into the green, with the Dow at one moment sporting a 400-point gain but, things turned sour quickly, and the major indexes dove into the close.
Only the Dow managed to cling to its unchanged line, while the S&P and Nasdaq ended solidly in the red with the former now scoring a 5-day losing streak. For sure, key inflation data caused uncertainty with the PPI due out tomorrow, followed by the CPI on Thursday. Rounding out week will be retail sales on Friday and the beginning of earnings season.
Causing late dive in the markets was a report from the Bank of England indicating that its intervention will be over soon and that pension funds have just three days to rebalance positions. For sure, that was tough talk, now we’ll have to wait and see if it was simply a bluff with the bailout scheme scheduled to continue.
Bond yields were mixed and slipped a tad, but the 10-year kissed its 4% level again before backing off into the close. The US Dollar rode a roller coaster and scored only a slight gain.
All eyes are now on tomorrow’s Producer Price Index report, which could create much volatility by pushing markets in either direction.
While the major indexes closed off their intra-day lows, they nevertheless scored another loss, as several rally attempts did not hold, and south we went.
As I pointed out last week, the massive rebound, that propelled the Nasdaq some 6.5% higher on Monday and Tuesday turned out to be another head fake with the index surrendering all gains over the next 3 trading days:
The baseball term “Going, going, gone…” clearly applies here, as bear market bounces can be fast and furious, but they usually tend to fall apart quickly, as we witnessed.
Adding more insult to injury was today’s session, which pushed the index down by another -1.04% to its lowest in over 2 years, as tech shares continue to be hardest hit in this environment of spiking interest rates.
As a result, we saw more of the same weakness, despite the US bond markets being closed. However, bond futures traded and added more pain to equities via higher yields, the continuation of which we may see tomorrow. Fortunately, during the end of the session, yields came off their highs.
Despite the BoE recent attempt to bail out their bond markets, and efforts to present a new plan, their market broke again with their 30-year Gilt (bond) yields racing higher by a stunning 29bps and almost reaching last month’s high, when the bank slammed on the emergency brake.
Since all Central Banks are tied at the hip, some of England’s issues could very well travel across the Atlantic and affect markets here in the US. My point is that bonds are no longer the ‘safe haven’ they were advertised to be and not being exposed to them is a wise investment decision.
The Fed’s Brainard offered these words of wisdom:
Fed is attentive to risks of further adverse shocks, aware that [market] moves could interact with financial vulnerabilities.” However, she also noted that the “1970s taught [policymakers] that there are risks to easing prematurely”.
In other words, there was no “dovish pivot” present in these remarks, which was disappointing to the always hopeful bullish crowd.
The US Dollar continued its 4-day comeback to one-week highs, as ZeroHedge noted, which caused gold to get hit, with the precious metal dropping below its $1,700 level.
High volatility will remain with us, as Wednesday’s monthly Producer Price Index (PPI) and Friday’s CPI could wreak havoc with markets—in either direction.
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 19 (last week 12) 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.
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.
Right now, it sure looks like the bullish feel-good hope moves of Monday and Tuesday were nothing more than another dead cat bounce, with most gains having been surrendered as the bears battled back and took the upper hand.
For the week, the S&P 500 managed to eke out a gain of 1.5%, which is a far cry from the almost 6% it had scored by Tuesday night. Looking at the bigger picture, you can see that all the major indexes are still down over 20% from their highs.
All eyes were on today’s jobs report, which showed that the US economy gained 263k jobs in September, just a bit lower than the estimate of 275k. However, what put a damper on bullish sentiment was the fact that unemployment slipped to 3.5% from the August’s 3.7%.
While that is good news, it was bad news for the market, because it reflects a strengthening jobs picture, despite the Fed’s attempt to slow the economy with continued rate hikes to battle inflation. Combining this drop in unemployment with yesterday’s low level of initial jobless claims, and you have an environment that will motivate the Fed to continue with its hawkish policy of nudging rates higher.
Added ZeroHedge:
Great news America – the unemployment rate has tumbled (with Hispanic unemployment at record lows).
Terrible news America – improving labor market statistics are the opposite of what The Fed is trying to do, and this data today is not going to encourage any pause or pivot anytime soon.
That was not what traders and algos wanted to see, and down we went. Not helping matters was a shockingly bad revenue and margin preannouncement from Advanced Micro Devices (AMD), which made a mockery of its own guidance from August, as ZeroHedge explained.
This disaster was followed by powerhouse FedEx, which offered lower volume forecasts, a surprise that sent its stock down some 4%.
As ZH pointed out, even those traders invested in Defensives ended the week with a loss, which confirms my belief that this is the time to be out of the market and, due to ever increasing uncertainties, eliminate portfolio risk altogether, as even the most shorted stocks did nothing but ride the rollercoaster.
Bond yields ratcheted higher with the 10-year again trying to reclaim its 4% level but so far falling short of it. The US Dollar whipsawed this week and ended about unchanged with Gold following suit and managing to successfully defend its $1,700 level.
With OPEC+ going their separate ways, and reducing daily output, Crude Oil surged and ended the week around $93 with the magic $100 marker now being in striking distance. That also means, higher prices will be coming at the pump.
The big picture analog to 2008-2009 shows us that we are on target for a possible historical repeat, but we are only half way there.
Watching this slow motion trainwreck from the sidelines never felt so good.
ETF Data updated through Thursday, October 6, 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 an 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 Termsand 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 -8.73% and remains in “SELL” mode.
Overnight weakness, followed by an early dump, with the Dow dropping some 400 points, was reversed as bullish sentiment prevailed causing traders and algos to pull the major indexes out of a hole and back to within striking distance of their respective unchanged lines.
After two days of strong gains, the widely followed S&P 500 closed lower by a moderate amount, as the index gave back -0.19%, which was a nice recovery off the session’s lows. However, the S&P was not able to hang on to its 3,800 level, which it had crossed intra-day.
Today’s action reflected a moment of pause and deliberation as to how durable the current advance might be. After all, this rebound was based on nothing but hope that the Fed will make, or be forced to, a dovish pivot. So far, there have been no indications.
Bloomberg elaborated on the turnaround:
One giant options transaction may have sparked the S&P 500’s bounce on Wednesday, according to Wells Fargo & Co. The trade, which involved buying and selling call options tied to the index at a cost of around $31 million, probably helped fuel a recovery that saw the benchmark gauge erase a 1.8% decline.
A better-than-expected jump in jobs, as per ADP, showed an increase of 208k jobs vs. an expected 200k, but more important will be Friday’s non-farm payroll report.
Bond yields jumped but did not affect equities negatively, despite the 10-year climbing 12bps to end the session at 3.754%. The US dollar, after a 5-day down streak, showed signs of life again and rebounded almost 1%.
Crude Oil jumped as well, due OPEC now being in the process of reducing daily production. Ouch!
Gold bounced erratically but managed to defend its $1,700 level.
As ZeroHedge noted, financial conditions have eased notably over the last 3 days, which is not what the Fed wants to see. My conclusion is that they are not ready to pivot anytime in the very near future.
