Slumping Bond Yields Equal Surging Equities

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

For a change, the positive mood in overnight futures trading, carried through into the regular session with equities surging out of the gate without so much as taking a pause.

Turns out that after last week’s rut, some Central Banks (CBs) around the world were not taking any chances. Some doubled the amount of daily QE (Quantitative Easing) thereby causing bond yields to plunge, which gave equities a much-needed boost.

Other CBs joined the party not with definitive action but via using the effective tool of jawboning. The ECB, for example, said that it will not tolerate higher yields and expects Fed head Powell to calm markets as soon as this week.

And there you have it. Any possibility of a free market setting rates and trading based on price discovery has forever been banned, and we continue to live in a managed market environment, an opinion I have presented ad nauseam.

All last week’s concerns are now forgotten, and the major indexes jumped into March and closing solidly in the green. Hope of economic reopening along with vaccine optimism helped the tech sector to sport gains of some 3%.

With bond yields heading lower, last week’s inflation concerns have now been moved to the back burner, but should not be forgotten, as US PMIs (Purchasing Managers Index) signaled that “record-breaking inflation is on the way,” as ZH described it.

The red line in the sand, above which bond yields will become an issue for stock prices, is the 1.45% level, as Bloomberg points out in this chart. Today, we lucked out in that this level was not breached to the upside.

Right now, the bulls seem to be in charge, and we will make our adjustments accordingly.

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ETFs On The Cutline – Updated Through 02/26/2021

Ulli ETFs on the Cutline Contact

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 243 (last week 258) 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.      

ETF Tracker Newsletter For February 26, 2021

Ulli ETF Tracker Contact

ETF Tracker StatSheet          

You can view the latest version here.

CLOSING THE MONTH ON A WEAK NOTE

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Despite a slightly positive opening, the markets dropped sharply thereafter but attempted to rebound throughout the session. It was only the Nasdaq, which after some heavy drubbing early in the week, managed a green close, while weakness prevailed in the Dow and S&P 500.

A couple of our ETFs had triggered their trailing sell stops yesterday. Today’s pullback gave the confirmation I was looking for and those two were liquidated. Since both were volatile, this sale provided the perfect excuse to turn unrealized gains into realized ones and allow me, should bullish momentum pick up next week, to rotate into areas better suited in the current environment. If, on the other hand, the bears continue to flex their muscles, we will have reduced our market risk and will be able to better withstand a southerly trend.

The Dow was riding the roller coaster all day, swung wildly, and closed near the session’s low point. Wall Street continued its struggle with rising bond yields, which at some point will punish equities.

Have we reached this moment in time already? It’s too early to tell, but it is definitely a possibility. I think the situation will become much clearer as we enter March.

For the month of February, we saw the Dow and S&P 500 gain 3.5% and 2.61% respectively, with the Nasdaq only adding a meager 1.9%, as the second half of the month was not kind to the tech sector.

After having spiked to over 1.6% yesterday, bond yields calmed down a little with the 10-year retreating to the 1.42% area. The US Dollar index bounced off of yesterday’s low and, in combination with elevated bond yields, pushed gold down and below its $1,800 level—again.

Even though the indexes closed in the green for the month, most of the gains happened in the first half. Subsequently, bullish sentiment seems to have lessened over the past 10 days or so. This may be just a pause in an ongoing bull market, but it could also indicate a directional change.

Our trailing sell stops, once triggered and executed, will point the way to safety, should such a move become necessary.

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 02/25/2021

Ulli ETF StatSheet Contact

ETF Data updated through Thursday, February 25, 2021

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 7.5% 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 7.5%-10% 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 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 +17.39% and remains in “BUY” mode as posted.

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Bond Yields Jump And Markets Dump

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

I have repeatedly pointed to rising bond yields as being the big equalizer that could affect equities negatively, and that’s what happened today. For the past 2 trading days, it was the Fed & Co. issuing well placed statements thereby assisting the major indexes to overcome early bearishness.

Where was the Fed head today? Nowhere to be heard is the answer, as bond yields continued their climb, thereby clobbering equities in the process. The 10-year soared above 1.6% in a sudden move, which some described as a “flash” spike. It settled at 1.523, up an astonishing 14 basis points.

Although some Fed mouthpieces tried to calm the nerves of traders, as ZH posted:

*FED’S BOSTIC SAYS “I AM NOT WORRIED” ABOUT MOVE IN YIELDS

*BOSTIC: FED DOESN’T NEED TO RESPOND TO YIELDS AT THIS POINT

*BOSTIC SAYS YIELDS STILL `VERY LOW’ FROM HISTORIC PERSPECTIVE

Even a mid-day rebound attempt in the major indexes had no chance of survival, and south we went. The Nasdaq got spanked the most and dropped -3.52% but was “outperformed” to the downside by the top gainer of the year, namely SmallCaps (IWO), which skidded -4.17%.  

In the end, especially the bond/equity portfolios had their worst day since March 2020 due to bond yields rising and equities falling, causing bonds, which usually move opposite of equities, create even more pain for these types of portfolios. Case in point is the widely held 20-year bond ETF TLT, which got clobbered by -1.63%.

In other words, there was no offset to mitigate the fall of equities.

Not helping matters were hedge fund liquidations to cover margin calls in stocks they had re-shorted, and which were squeezed higher, thereby forcing fund managers to liquidate quality assets (tech sector) indiscriminately. Ouch!   

Higher yields plus a rallying US Dollar kept Gold in check with the precious metal losing its $1,800 level again.

We are getting close to some of our trailing sell stops hitting their trigger points, and once that happens, they will be liquidated in accordance with our trading rules.

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A Fed Assisted Bounce-Back

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

An early market dump received an unexpected assist, which turned into a big intraday comeback. Unlike yesterday, when Fed head Powell uttered some soothing remarks to pull equities out of a deep hole, today, the torch was passed.

It was none other than Fed Gov Lael Brainard who took center stage first and voiced this dovish comment:

“The economy remains far from our goals in terms of both employment and inflation, and it will take some time to achieve substantial further progress.”

This was followed by Powell’s semi-annual testimony, which was market friendly and contained no surprises, after which stocks and bonds went on a rampage.

Yes, that was all it took for the markets to change direction and shift into high gear with all 3 major indexes soaring, led by the Dow. Even the Nasdaq and SmallCaps (IWO), which have struggled as of late, catapulted higher by +0.99% and +2.10%.

Rising bond yields also shifted in reverse with the 30-year dropping 5 basis points from intraday highs while the 10-year performed similar magic. For sure, had it not been for the “rescue operations” by the above Fed Gov/Powell team, we might have seen an ugly sell off.

The US Dollar could not make up its mind and simply roundtripped, thereby pushing Gold around, however, the precious metal did not gain anything yet managed to hang on to its $1,800 level.

This day leaves me pondering “who will save the markets tomorrow?”

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