Despite yesterday’s massive rebound, the markets did not waver but stayed the course and notched more gains. The S&P 500 was trying to get into record territory but fell short, while the Nasdaq showed more upside momentum and climbed to a new all-time high.
The tech sector led Tuesday’s advance by a modest margin, with Small Caps following suit, whereas the value ETF RPV remained unchanged after Monday’s impressive jump.
Equities accelerated to the upside when Fed head Powell answered questions from House members that underscored his bullishness about the economic comeback, while maintaining his stubborn stance that inflationary forces were transitory. He emphasized that inflation should settle back to 2% over the long term.
Be that as it may, the markets took it as a dovish sign and green ended up being the choice color of the day.
The 10-year bond yield rose to touch the 1.5% level but backed off and closed at 1.48%, down 2 basis points. Even though the US Dollar index gave back some of its recent gains, it was not enough to spark a rally in Gold which, in the absence of buying interest, dropped -0.36%.
In the end, it was a positive session after a huge rally, which has a chance to continue provided that dovish jawboning stays headline news.
Ripping higher after the sound of today’s opening bell had barely faded was the meme for the day with the major indexes posting solid gains after last week’s Fed induced pullback. Dipping into the red early on was the Nasdaq, which recovered but lagged throughout the session.
When all was said and done, Friday’s plunge was entirely wiped out, and we now find ourselves back at the closing levels of last Thursday. Apparently, traders came to their senses over the weekend due to the Fed’s announcement of possible rate hikes in 2023 being nothing more than jawboning about a distant future, with no imminent action being on deck that could jeopardize the current bullish theme.
As a result, the markets focused on the present moment and staged a broad rally that allowed some of last week’s hard-hit sectors to recover nicely. “Value” outperformed “growth,” with RPV racing ahead by +2.50% followed by the financials (XLF) with +2.33%. Even the commodities index DBC showed signs of life with a gain of +1.34%.
ZeroHedge pointed out that things got started in Japan last night with their respective Plunge Protection Team (PPT), which bought some $70 billion of ETFs, sending the Nikkei on a rampage. The US followed suit by assembling their own PPT, picked up the baton and the levitation began.
10-year bond yields spiked to Friday’s level, while the US Dollar gave back some of its recent gains. Commodities bounced across the board with GLD adding +1.21%, but more concerning in terms of inflation was Crude Oil’s surge to over $73.
The direction of some commodities can be a harbinger of what might happen next in the stock market. That lead ZeroHedge to post the question “Is Dr. Copper or Dr. Crude right about what happens next?” Bloomberg points to the divergence in this chart.
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 253 (last week 264) 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.
The fact that the Fed’s announcement of higher rates possibly in 2023, some 2 years from now, caused such a disturbance in the financial markets, goes to clearly confirm the one thing I have been pounding on for years. Namely, that without artificially low interest rates and reckless bond buying by the Fed at the tune of $120 billion per month, stocks would be at a much lower level and are only hovering in bubble territory because of the Fed’s largesse, aka manipulation.
After all, how else can you explain this current fallout based only on the possibility of higher rates two years from now?
Be that as it may, today’s quadruple options expiration session greatly contributed to increased volatility with all major indexes hitting the skids, but it could have been far worse than the S&P 500’s 3.5% drop for the week.
To some investors, this pullback appears to be a big deal, but only because we have not seen these kinds of fluctuations since January, as market instability has been “well managed” over the past few months.
Not helping the sour mood on Wall Street was the Fed’s mouthpiece Jim Bullard, who told CNBC:
It was natural for the Fed to tilt a little “hawkish” this week and that the first rate increase from the central bank would likely come in 2022.
That was a change from the original forecast of two hikes in 2023, but who knows how much the narrative will change as time goes on. For right now, the Fed threw down the gauntlet, and the markets reacted.
There was no escape as even energy, industrials, financials, and materials took a licking. The yield curve drastically flattened, which means that shorter term Treasuries, like the 2-year note, rose, while longer-term durations, like the 10-year bond, declined.
Elaborated CNBC:
The retreat in long-dated bond yields reflects less optimism toward economic growth, while the jump in short-end yields shows the expectations of the Fed raising rates.
Despite getting hammered recently, commodities managed a bounce-back today, the US Dollar Index spiked sharply and is approaching March highs, which was enough to send gold into the basement, with the precious metal now having to climb out of a deep hole to get back to last week’s prices.
At least the always unpredictable quadruple witching hour has passed, and we will have to wait and see if traders will find market optimism over the weekend to pull the indexes out of their doldrums.
Or could it be that a bear market is in the making?
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 8% 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. Since these areas tend to be more volatile, I recommend a wider trailing sell stop of 8%-10% 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 +13.59% and remains in “BUY” mode as posted.
The morning, after the Fed’s announcement that it envisions two rate hikes in 2023, thereby subtly admitting that inflation may not be transitory, traders were shocked to see today’s market reaction, as this chart demonstrates.
ZeroHege described it this way:
Traders are watching in stunned amazement at what is going on in the market where contrary to everything the Fed has said, we are seeing a stampede into tech, growth, and duration-sensitive names…and a flight out of reflation and value sectors…
Bonds were in a world of their own when, after yesterday’s yield spike, which represented a normal reaction to potentially higher rates, opposite day arrived and slammed yields lower back down to the June 11 level. The 30-year yield crashed down to a price last seen on November 20.
Huh? Even seasoned traders watched this unreal development open-mouthed and were not able to come up with a reasonable explanation. Bank stocks got hit hard, which pushed the Financial Sector ETF down -2.90%. The US Dollar surged for the 5th straight day, as ZeroHege pointed out, thereby clubbing Gold like a baby seal, which slumped -4.68% and dropped below its $1,800 level. Ouch!
It was a day where nothing made sense and even the inflation-sensitive commodity sector got annihilated and suffered its biggest drop since March 2020. In other words, things that should not have happened did happen.
In the end, it may not have been the Fed causing havoc in some market sectors, but what is about to take place tomorrow. That is massive options expirations in SPX and QQQ with a total value of some $2 trillion!
What we saw today may have been just a front run of tomorrow’s main feature.
