ETF Tracker Newsletter For December 16, 2022

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ETF Tracker StatSheet          

You can view the latest version here.

RECESSION FEARS REIGN SUPREME

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

After yesterday’s drubbing, and today’s roller coaster ride, the latter of which occurred due to a massive quadruple options expiration session, it comes as no surprise that the markets took another dive.

The Dow was down as much as 550 points at its worst moment but managed to pair some of those losses, as did the other two major indexes. However, we ended solidly in the red, but gold bucked the trend, closed higher, and recaptured its $1,800 level.  

This second week of losses has the S&P 500 down about 6% for December, which now makes traders question whether this means the much hoped for Santa Claus rally has vanished. The story is far worse when looking at the FANG stocks, which not only have lost over 50% from their peak market cap from November 2021 but also tumbled over $600 billion this week alone.

Recession fears, and the Fed’s commitment to continue its relentless rate hiking schedule for “higher and longer” through 2023, to combat inflation, means that any kind of pause or pivot is not on the horizon. That also implies future earnings will be affected, something that the Wall Street crowd seems to finally have acknowledged, hence the sell off.

Those facts will not bode well for the markets as we enter 2023. While anything is possible, I believe that we will take out the October 2022 lows at some point. We must be prepared for the possibility of the bears taking over again. Case in point is today’s second straight weekly loss for the S&P 500, which pushed our TTI back into bear market territory (section 3).

Adding to the current misery were a few data points, which seemed to support the view for a change in market direction. Both, US Manufacturing and US Services dropped not only into recession territory but also to their lowest since May 2020. As a result, the Economic Surprise index retreated to a level last seen in May.

And the final nail in the coffin came from two Fed mouthpieces, which reinforced their hawkish message, as ZeroHedge pointed out:

  • DALY: “INFLATION IS TOXIC“, FED “IS FAR AWAY” FROM ITS PRICE-STABILITY GOAL, MAY NEED MID-4% OR MORE JOBLESS RATE FOR LABOR-MKT BALANCE
  • MESTER: HAVEN’T SEEN IMPROVEMENT ON SERVICE-PRICE INFLATION
  • DALY: DON’T KNOW WHY MARKETS ARE SO OPTIMISTIC ON INFLATION, PREPARED TO HOLD PEAK RATE MORE THAN 11 MONTHS IF NEEDED
  • MESTER: NEED TO KEEP FUNDS RATE ABOVE 5% IN ’23 TO CURB PRICES, FED HAS `MORE WORK TO DO ON INFLATION,’ IT’S TOO HIGH

I have repeatedly pointed to similar comments over the past few months, which to me means only one thing, namely that equities will face severe headwinds in 2023. Hence, it’s important to follow the direction of the long-term trends and make investment decisions based on them and not wild guesses and predictions.

After all, only the trend is your friend.

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 12/15/2022

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ETF Data updated through Thursday, December 15, 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: BUY — since 12/01/2022

Click on chart to enlarge

Our main directional indicator, the Domestic Trend Tracking Index (TTI-green line in the above chart) has broken back above its long-term trend line (red) by +0.27% and remains in “Buy” mode.  

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The Morning After: Recession Angst Grips Markets

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Even though the Fed hiked rates as expected, a “morning after” hangover set in, as today’s poor retail sales confirmed current recessionary tendencies. Sales dropped -0.6% in November, which was twice the expectations of a -0.3% decline.

US Industrial Production did not help matters, because it fell 0.2% MoM (0% expected) and dropped to its weakest since September 2021, according to ZeroHedge.

Regarding the Fed’s stance on interest rates, analyst Peter Schiff summarized it best:

Now, that doesn’t mean the Fed shouldn’t be raising rates. They should be. They should have raised them a lot more than they have. The problem is they never should have cut them. That was the mistake — it was cutting rates. Raising them back up is really just an acknowledgment of that mistake. But what happens is when the Fed raises rates, it uncovers all of the problems that it created when it reduced rates. Because when it slashed interest rates to zero, it inflated a bubble economy, and it inflated it with inflation. Quantitative easing was inflation.

Then we learned that the Philadelphia Fed admitted that US Jobs were “overstated” by at least 1.1 million, a shocking story that you may want to read in detail, if this topic interests you.

As a result, the major indexes were spanked and yet again, there was no place to hide. Our Trend Tracking Indexes (TTIs) were slammed as well but remained a tad above their respective trend lines.

We’re now facing the possibility that our recent “Buy” signal may turn out to have been a head fake, but it’s too early to tell. Tomorrow’s $4 trillion options expirations session may shed more light on where the major trend is headed into the end of the year.

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Fed Hike Creates A Choppy Ride

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Fed head Powell came out and did the expected, namely hike rates by 0.5% to maintain the efforts of crushing inflation.

However, the Fed also signaled that it will not only hike rates higher than traders had anticipated but also hold those rates higher for longer, a hawkish theme that I have pounced on for months, yet wishful thinking of an imminent pause or pivot had dominated Wall Street thinking.

While the major indexes had spent most of the morning above their respective unchanged lines, the Fed’s announcement caused a kneejerk reaction, as equities dropped sharply but then managed to claw back some of the losses.  

ZeroHedge summarized Powell’s speech like this:

POWELL: LABOR MARKET REMAINS EXTREMELY TIGHT

POWELL: A RESTRICTIVE POLICY STANCE LIKELY NEEDED FOR SOME TIME

POWELL: NEED SUBSTANTIALLY MORE EVIDENCE OF LOWER INFLATION

POWELL: FED STILL HAS SOME WAYS TO GO ON RATE HIKES

POWELL: STANCE ISN’T YET RESTRICTIVE ENOUGH EVEN W/ TODAY’S MOVE

POWELL: NO RATE CUTS UNTIL CONFIDENT INFLATION MOVING TOWARD 2%

POWELL: WILL HAVE TO HOLD RESTRICTIVE RATES FOR SUSTAINED TIME

In other words, the Fed made it very clear that it will continue its path of hiking rates, announced numerous times over the past few months, with only its magnitude changing depending on the latest data points.

Bond yields rode their own roller coaster with most yields closing lower after the initial spike. The US Dollar followed the same pattern, as did Gold, with the precious metal dropping a tad but holding on to its $1,800 level.

Given Powell’s response about the Fed’s restrictive policy restraints above, it seems to me that equities will have a tough time advancing under those conditions, and I would not be surprised to see the bears get the upper hand again.

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Thriving And Diving

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

After the release of the highly anticipated CPI report, which came in “cooler” than expected, the major indexes stormed ahead with the Dow scoring a quick 400-point gain. The S&P 500 recouped its 200-day M/A but gave back that “victory” later in the session.

The CPI increased just +0.1% from the prior month and +7.1% YoY vs. expectations of +0.3% and +7.3% respectively. The core-CPI (without food and energy) rose +0.2% MoM and +6.1% YoY.

This are still horrific inflation numbers, but they were good enough for bullish juices to be released. However, early enthusiasm faded fast, as the major indexes dove back to their unchanged lines, and only managed to end the session with a moderate rebound but at least eking out a green close.

Helping the bullish theme were lower bond yields, the spanking of the US Dollar, and the everlasting hope that the Fed will become less restrictive, when they announce their interest rate changes tomorrow. Gold was the winner, with the precious metal gaining +1.70% and reclaiming its $1,800 level.

The odds for a 50bps hike tomorrow appears to be a given, but softer readings for next year are expected.

All eyes are now on Fed head Powell causing ZeroHedge to ponder: “Will he spoil the party?

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Front Running The CPI Report

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

While moderate bullish sentiment dominated market direction throughout the day, traders decided to shift upward momentum into overdrive during the last hour of the session, thereby pushing equities sharply higher.

The major indexes sported solid gains in the end, indicating that tomorrow’s CPI number is expected to come in lower than had been assumed. Should that be the case, we will see the bullish theme grow stronger and provide us with the much longed-for Santa Claus rally.

Bond yields jumped with the 10-year adding 12 bps to close at 3.62%. Rate trajectory expectations rose, as ZeroHedge pointed out, with the terminal rate now back up to 5%.

The US Dollar rode the rollercoaster but managed to eke out a small gain, Crude Oil rebounded after the recent drubbing, and Gold lost its $1,800 level by a small margin.   

All eyes are on tomorrow’s CPI release and Wednesday’s FOMC meeting, after which Fed head Powell will likely again elaborate his hawkish stance—higher rates for longer—which may not go over well with the Wall Street crowd, because they have almost desperately anticipated a pause or pivot in rate policy.

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