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 168 (last week 181) 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.
After the most recent bullish ramp, which commenced the middle of December, the major indexes finally ran into some headwinds in the form of surging bond yields and started 2022 by posting a losing week.
Given the nearness to its all-time highs, the S&P’s weekly loss of 1.8% is hardly concerning. The tech sector (-4%) bore the brunt of the selling due to its sensitivity to higher rates. Therefore, it’s not surprising that SmallCaps (-1.58%) were hit hard, along with the Pure Growth ETF RPG (-1.78%), while its value cousin RPV surged and gained a solid +1.34% for the day.
The culprit was spiking bond yields with the 10-year surpassing 1.79% today before settling at 1.77%. Again, we started the year with 1.51%, which means yields have shot up by 17% in only five trading days. The Fed has made it clear that it will dial back its economic help faster than anticipated, thereby creating anxiety and uncertainty in the trading community.
Not helping equites was today’s huge miss in December payrolls, as we learned that only 199k jobs were added, a huge miss to expectations of 447k and a whisper number of over 500k. Ouch! The unemployment rate dropped to 3.9% but, given shortages in most labor sectors, this may not be a positive.
The US Dollar took a dive and ended where it started the year allowing gold to score a modest rebound of +0.34%, which was not enough to reach its recently lost $1,800 level.
Traders will have to digest a lot of information this weekend.
ETF Data updated through Thursday, January 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 a wider 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: BUY— since 07/22/2020
Click on chart to enlarge
Our main directional indicator, the Domestic Trend Tracking Index (TTI-green line in the above chart) has now rallied above its long-term trend line (red) by +5.96% and remains in “BUY” mode as posted.
Another up and down day supported the meme that bulls and bears are engaged in a tug-of-war with the latter so far coming out on top. However, today, the forces were more evenly matched, as the major indexes surrendered only a fraction with the Dow faring the worst.
The tech sector was in scramble mode with some of their darlings continuing to slide, which made traders realize that tech will not always be the winner every trading day in 2022, thereby causing the overweight allocations to be adjusted.
The main irritant behind today’s scramble remains the hard to accept fact that the Fed will remove its economic stimulus more quickly than hoped for, which has contributed to the wild swings of the recent days. Odds are now 86% that we will see 3.5 rate-hikes by the end of 2022.
As a result, bond yields continued their climb higher with the 10-year touching the 1.75% level before pulling back to the 1.72% area. For reference, the 10-year ended 2021 at 1.51%. The main beneficiary of this ramp has been the banking industry with the financial ETF XLF adding +1.5% for the session.
The US Dollar chopped around as well and ended slightly in the green, but gold was the dud of the day after getting hammered and losing its $1,800 level again. The precious metal gave back -2.04%.
Can tomorrow’s jobs report give an assist to the bulls?
Though the Dow staged a solid rally early in the session, the S&P 500 was barely hanging on to its unchanged line, but the Nasdaq never saw any green numbers. All of this changed mid-day with the major indexes simply losing steam and dumping into the close led by the Nasdaq with a loss of -3.34%.
At the center of this turnaround were the minutes of the Fed’s most recent meeting, which showed members discussing a reduction of their balance sheet right after their intended rate hikes later in 2022.
MarketWatch added some color:
The Fed is tapering its bond purchases now and has already indicated to the market that it will raise rates soon after it finishes that taper in March. But the market is awaiting indications from the Fed on what it will do with its nearly $9 trillion balance sheet once it’s done increasing it. The minutes show officials to be considering shrinking the balance sheet along with raising rates as another way to remove policy accommodation.
Ouch! That was more of a hawkish view than traders had expected and down we went. Remember, the increase of the Fed’s balance sheet is and has been directly correlated with market advances, so a reversal of their policy might have an adverse effect due to a reduction in liquidity.
Adding insult to injury, then this:
“Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” the minutes stated.
In other words, higher rates and bond yields will be on deck much sooner than expected and may exact their pound of flesh from the markets. As ZeroHedge commented, as of this moment, the entire Santa Claus rally has been erased.
SmallCaps (-4.18%) and Growth (RPG, -3.81%) were hit the hardest, while value (RPV) held up the best by giving back only a modest -0.55%
Bond yields rose with the 10-year touching the 1.7% level but closing just a tad below. The US Dollar index rallied and, even though gold held steady above its $1,800 level, it gave back a scant -0.26%.
The question in my mind is this one: How much will the markets have to drop before the Fed reverses policy again and comes to its rescue?
