ETF Tracker Newsletter For September 16, 2022

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ETF Tracker StatSheet          

You can view the latest version here.

FedEx WHACKS MARKETS

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

After yesterday’s thrashing, the markets continued to vacillate in red territory throughout the entire session, but the major indexes managed to rebound a bit to close off the lows for the day. Still, it was a week that most traders were relieved to see come to an end, as the losses were broad with the S&P 500 dropping 4.8%. Ouch!

Not helping matters was FedEx, after it withdrew its full-year guidance and said it will implement cost cutting initiatives, as the global economy has drastically worsened. The stock got clobbered and ended down some -24%. Transports tend to be the canary in the coalmine, so we can expect more negative announcements in that area.

The major indexes have now scored their fourth losing week out of five, which gives even more credence to the idea that any rebound is merely a dead-cat-bounce, as my indicators are confirming via their position below their respective trend lines (section 3).

Bond yields rose this week, the US Dollar surged, which meant Gold could not hold on to some of its gains, and the precious metal closed lower despite today’s bounce.   

Added ZeroHedge:

In a scenario where the Fed has to keep pushing against growth until the unemployment rate reaches 5%, we see S&P 500 down-side to 3400.

And in a scenario where unemployment hits 6%, the S&P 500 may dip below 2900. In other words, there may be a lot more downside to markets if stagflation persists.

Updating and extending the financial crises analog to 2008-2009, this picture is worth a thousand words.

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 09/15/2022

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ETF Data updated through Thursday, September 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 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 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 -5.76% and remains in “SELL” mode.

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Struggling For Direction

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

After yesterday’s bloodbath, it came as no surprise that dip buyers surfaced and nibbled hoping to catch the market equivalent of a falling knife. The major indexes vacillated above and below their respective unchanged lines but managed to eke out some small gains, thanks to a last hour rebound.

Trying to find some footing during this choppy and sloppy session was the goal, after the indexes notched their biggest one-day drop in more than two years. The Dow was the weakling and barely reached its unchanged line after an early 200-point drop.

Traders are now pondering the uneasy question as to whether equities will head back to their June lows, or even break through that marker and fall much further, as the certainty, that the Fed is serious about fighting inflation, has everyone on edge.

However, in the end, equities could face a double whammy, or a “death blow,” as ZeroHedge called it, when higher rates and lower earnings (from the upcoming economic slowdown) combine forces to push stocks to much lower levels.

After all, when lower rates and a growing economy support higher stock valuations, the opposite also holds true—and that looks to be the direction we are headed.

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Markets Puke After CPI Data

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The wishful thinking of traders and algos alike, that peak inflation was behind us, came to a screeching halt today, when the latest CPI number showed a worse than expected reading of 8.3, and that a Fed pivot to lower rates is now nowhere on the horizon.

For months, I have commented ad nauseam that inflation is only in the beginning stages, even though last month’s CPI dropped a tad from the prior one, as if one lower reading represents a trend.

And just like that, the eager front runners, who pushed this market higher, starting after Labor Day, ran into the buzz saw of reality and surrendered all profits in one session. In other words, the dead-cat-bounce has died on the vine, as the Fed will now for sure hike rates at least 75bps next week—or even 100bps.

The major indexes tanked in unison, as not only the Fed’s hopeful pivot disappeared but also the odds of wishful soft landing. The Fed and his staff had made it abundantly clear over the past few weeks that fighting the inflation monster would be their main priority, a theme that was simply dismissed by traders and algos alike, so today, the piper had to be paid for that ignorance.

There was no place to hide in this ocean of red, and even Apple, after having its best day since May yesterday, suffered its worst day since May, as ZeroHedge pointed out. That’s the kind of idiotic market environment we’ve been in for a while, with the much talked about short squeeze abruptly coming to an end.

Bond yields screamed higher, as bond prices got slammed with the 10-year rallying 10bps to close at 3.42%. Rate hike expectations surged, while the US Dollar shifted in reverse and rallied thereby taking Gold back down, but the precious metal defended its $1,700 level.

As ZH pointed out with this chart, it’s catch-down time for stocks, and with a $3.2 trillion options expirations day lurking on Friday, will the 2008-2009 analog hold?

As Trend followers, we are out of equities and will watch the show from the safety of the sidelines.

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Front Running The CPI Report

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Stocks continued last week’s momentum to higher ground, as traders are still convinced that peak inflation is in the rear-view mirror, and that future rate hikes might be smaller because of it. That goes against Fed head Powell’s repeated assertions that he remains “strongly committed” to bring down inflation.

No matter how the CPI number will turn out tomorrow, the Fed meeting on Sept. 20-21 looms large with expectations being that they will deliver the 3rd consecutive 0.75% rate hike. In the meantime, a softer than expected CPI reading could maintain bullish momentum and soon create a new Domestic Buy signal for our Trend Tracking approach. At this time, we are not quite there yet, as you can see in section 3 below.

As is usually the case, no major rebound can materialize without a solid short squeeze. That was the case over the past 4 trading days, as the most shorted stocks got squeezed by some 14% off their lows, as ZeroHedge posted.

Bond yields rallied with the 10-year adding 6 basis points to close at 3.36%. The US Dollar tanked again, which allowed Gold to score another winning session above its $1,700 marker, despite a late day sell off.

With the CPI on deck tomorrow, traders may again ignore the Fed’s latest warning that one month’s report will not sway them in their fight against inflation.

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ETFs On The Cutline – Updated Through 09/09/2022

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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 38 (last week 27) 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.