Front Running The CPI Report

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[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.      

ETF Tracker Newsletter For September 9, 2022

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ETF Tracker StatSheet          

You can view the latest version here.

SHATTERING A 3-WEEK SLUMP

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Despite the Fed having gone all out with its resolve of fighting inflation confirmed via a variety of speeches by Fed governors and Fed head Powell himself during his Jackson Hole 10-minute closing speech, the markets are simply not buying it and calling his bluff.

Here’s what he said:

Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

The markets tanked originally over a 3-week span, but during this Holiday shortened week, traders and algos alike challenged his conviction of not turning dovish soon and pumped stocks higher hoping/wishing/concluding that the much-awaited pivot will be close at hand. And that despite another host of hawkish announcements, as ZeroHedge posted:

  • *BULLARD SAYS MARKETS UNDERPRICING ‘HIGHER FOR LONGER’ RATES
  • *BULLARD SAYS GOOD CPI REPORT SHOULDN’T AFFECT SEPT. FED CALL
  • *WALLER BACKS ‘ANOTHER SIGNIFICANT’ RATE HIKE IN SEPTEMBER
  • *WALLER: INFLATION FAR TOO HIGH, PREMATURE TO JUDGE IT’S PEAKED
  • *WALLER: IF WE DON’T GET INFLATION DOWN, WE’RE IN TROUBLE
  • *GEORGE: FED HAS SOME ROOM TO RUN TO BRING INTEREST RATES UP
  • *GEORGE: WARNS OF POSSIBLE DIFFICULT PATH IN LOWERING INFLATION

Even a continued surge in Rate Hike Expectations did nothing to stop the bulls from pushing the indexes higher. Just as higher bond yields did not change traders’ minds. The US Dollar slipped off its mid-week high, which enabled Gold to recapture its $1,700 level.  

In the end, the S&P 500 gained 3.6% during the past 4 trading days, thereby wiping out the past 2 weeks of losses. While it’s too early to tell if this week’s activity turns out to be another head fake, it’s clear to me that the Fed will continue its mission to tighten monetary policy, which will be a headwind for equities going forward.

Nevertheless, bear market bounces will always be part of that equation, but we must be prepared that out of one those rebounds a new bull market may emerge.   

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 09/08/2022

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ETF Data updated through Thursday, September 8, 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 -3.52% and remains in “SELL” mode.  

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Shaking Off A Three-Week Slide

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

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All eyes were on today’s release of the Fed’s Beige Book, which showed again that bad news can be good news, as far as the markets are concerned. To sum it up, key words that assisted the bulls were “downgraded growth,” “softening demand,” and “moderating price increases.

Manufacturing was mixed, with supply chain bottlenecks limiting activity, while labor markets remained tight. However, what really mattered was Fed Vice Chair Brainard’s affirmation that the Central Bank would do what it takes to restrain inflation. She also noted the potential risks of going too far, and that was the part of her speech that traders and algos alike focused on, and the rally was on.

Some support came from the fact that the markets were oversold, after the beating of the last 3 weeks, during which the S&P 500 got spanked at the tune of over 9%. Other comments from the Fed’s Barr (inflation is “far too high”) and Collins (inflation is “simply too high”) should have taken the starch out of today’s rally—but didn’t.

However, the comments sent the odds of a 75bps hike in September up to 90%, which also was an event that stocks simply ignored, as the goal appeared to be to end the worst losing streak in 6 years, as ZeroHedge put it.

I consider today’s rebound to be another bear market rally, which barely made a dent in the losses sustained for buy-and-holders, since Powell’s Jackson Hole comments.

Bond yields softened from yesterday’s vicious rebound, the US Dollar took a dive, and Gold bounced off its $1,700 level again.

Despite many opinions to the contrary, I believe the June bottom (yellow circle) will be still taken out:

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Surging Bond Yields Wreck Markets

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

A feeble rebound attempt right after the opening was easily rebuffed with the major indexes swinging wildly throughout the session, but the bearish theme outlasted any bullish attempts, so we closed in the red—again. The Nasdaq posted its 7th straight day of declines, its longest losing streak since November 2016, according to ZeroHedge.

A better-than-expected ISM reading (Purchasing Managers Index), following Friday’s jobs report, added to concerns that a more solid economy will give the Fed further reason to hike aggressively when they meet later this month.

That did not bode well for equities and sent bond yields sharply higher, with the 10-year at one point being up 16bps to 3.53% before retreating and settling at 3.34%. Rate hike expectations surged along with future rate cut expectations to validate the current hawkish tendencies.

As a result, the US Dollar reversed Friday’s course and ripped higher and, in the process, pulled Gold back down after last week’s rally attempt.  

Economist Dr. Doom, AKA Nouriel Roubini, added this warning:

I worry about a stagflationary debt crisis because you have the worst of the ’70s in terms of supply shocks, and you have the worst of the global financial crisis because of too much debt, and that combination is dangerous.

If you’re behind the curve, eventually the recession is going to be more severe, the loss of jobs and income and wages is going to be more severe.

Makes me wonder if the analog to 2008-2009 will continue to be on target?

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