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 322 High Volume ETFs, defined as those with an average daily volume of more than $5 million, of which currently 60 (last week 66) 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.
Some reality struck the markets today, as big tech earnings disappointed and Trump threatened to pick up the tariff war with China again, supposedly for its poor handling on the Covid-19 pandemic.
While MSM is still buzzed about last months Fed assisted rebound in equities, keep in mind that the S&P 500’s April +12.6% gain was preceded by a loss of -12.5% in March with those two months ending in a draw. Coincidence? Be that as it may, the markets need to gain another 7.2% to get to the level we sold at on 2/27/20.
As ZH reported, it’s interesting to note that while algos and quants were busy buying equities hand over fist, human and hedge fund investors continue to sell, as the assets held in money market accounts spiked.
Added BofA’s Hartnett:
“BofA’s private clients have reverted to equity ‘sellers into strength’ in the past 3 weeks…indeed past 2 years in 49 of 69 weeks S&P 500 has exceeded 2800 level private clients have been sellers.”
He further noted:
“Wall St always undershoots and overshoots…most plausible reason overshoot continues is that US policy makers have stimulated more in 10 past weeks than Japan has in 30 years and US real estate/banking/consumer data turns out not to be Japanese.”
And leave it to technical analyst Sven Henrich to lay out the details:
“The market is a follow the Fed machine long trained to jump back into equities at any sign of Fed action jawboning and promises. It’s no accident that “don’t fight the Fed” is popular mantra. It’s the very proof that market participants know that the Fed is in effect targeting asset prices. Just look at the past year and a half in this chart.”
Not helping the sour mood on Wall Street was a US Manufacturing Survey showing a record collapse in output, Orders and Jobs.
We are now seeking the biggest two-day drop since the March collapse, and the early weekly gain has now evaporated. Does that mean we are on track validating the adage “sell in May and go away?”
It’s a bit early for that but come next week, all trading rooms around the world will be fully staffed again after today’s Mayday Holiday, and we’ll find out whether the bulls can regain the lost momentum of the past couple of days.
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 Termsand new subscriber information in section 9.
1. DOMESTIC EQUITY ETFs: SELL— since 02/27/2020
Click on chart to enlarge
Our main directional indicator, the Domestic Trend Tracking Index (TTI-green line in the above chart) is now positioned below its long-term trend line (red) by -8.61% after having generated a new Domestic “Sell” signal effective 2/27/20 as posted.
After rallying all month, the major indexes stalled today, but were able to wipe out most of March’s losses for the buy-and-hold crowd with the S&P 500 sporting its best monthly return since 1987. Of course, as we know, the rebound was entirely based on Fed support, as the markets were swamped with liquidity. As a buy-and-holder, you should give thanks to the Fed’s largesse; next time you may not be as fortunate.
Analyst Marc Lasry confirmed in a CNBC interview what I have been saying for a long time:
“None of this [equity rally] is based on fundamentals, this is all about what the Fed is doing… and sooner or later reality will reassert itself.”
Joining in the chorus of reality was economist Jim Bianco:
“I understand the market has been up a lot since the March low. But what I see in the market is a retracement rally that looks very similar to the first type of rallies that you get in protracted bear markets.”
After which he added:
“We’ll revisit the 2,200 S&P low, if not make a lower low – probably by late summer.”
The economic conditions continue to worsen, as another 3.839 million Americans have field for unemployment benefits for the first time bringing the six-week total to 30.31 million which, according to ZeroHedge, is over 12 times the prior worst five-week period in the last 50-plus years. And, of course, the continuing claims are shooting up as well.
Consumer spending followed suit, as its spending collapsed by a record -7.3%, its sharpest drop since the first quarter of 1980. On the positive side, the savings rate exploded from 8% to 13.1% of disposable income, indicating, that consumers are starting to “live within their means.”
In the end, the mission was accomplished leaving me pondering if the adage “sell in May and go away,” still holds true, or will this time really be different?
Bullish sentiment got an early boost this morning after Gilead Sciences reported that a government clinical trial, designed to evaluate its experimental drug remdesivir in Covid-19 patients, had met the study’s main goal. Hopes were high for progress towards a successful treatment.
That news was good for an initial 350-point jump in the Dow and clearly overrode the potential bearish impact from horrific economic numbers:
Consumer spending fell -7.6% in the first quarter.
Pending Home Sales plummeted by a record in March to the lowest level since 2011.
Quarter 1 GDP plunges -4.8%, its biggest drop since the financial crises 10 years ago
Boeing burns through a record $4.7 billion in cash, revenue crashes 26%, 10% of workforce will be laid off
None of this mattered, as the bullish path had been set with Fed chief Powell committing to take strong action in order to support the economy and the markets by exuding an aura of confidence in the face of many unknowns.
After Powell’s initial announcement, stocks, the dollar and bonds dropped but managed to regain traction into the close. During his press conference he uttered the words I never thought I would hear:
“The debt is growing faster than the economy. This is not the time to act upon those concerns”
Huh? Just as was pondering as to what moment in time we should be concerned about the excessive debt creation, ZeroHedge had already managed to come up with several possible answers via this chart.
Although stocks have staged an amazing Fed assisted recovery since the lows in March, the Dow remains down some 15% YTD, but there is still one trading day left.
Some of the big hedge fund investors think the market rally in April has gone to extremes, while a survey showed that 16% are still saying the latest move was a bear market rally and further downside was ahead.
Rounding out the discussion was ZeroHedge with this observation:
“Of course, you don’t need to be a wealthy UBS client to understand there is a deep disconnect between the market and the real economy. Main street America has been wiped out, with approximately 30 million job losses in the past 6 weeks alone. And a new shocking report on Monday showed perhaps 50 million people have lost their jobs in the pandemic. Nevertheless, the Fed and Trump admin continue pumping record amounts of stimulus and bailout money to revive corporate America and Wall Street speculators.
If the economy doesn’t improve, meaning a V-shaped recovery is not seen and more of a U-shaped or L-shaped, it would suggest stocks have a long way to drop, likely resulting in the Fed panic buying stocks.”
In the meantime, our Trend Tracking Indexes (section 3) have improved greatly and, if the month of May does not follow the adage “sell in May and go away,” we might be seeing a new domestic “Buy” signal in the not too distant future.
The current discussion amongst Wall Street strategists involves the question as to whether a test of the March lows is coming, or if investor FOMO (Fear Of Missing Out) is strong enough to keep driving the markets to ever higher levels.
With the country starting to reopen slowly, traders apparently have no sense in how this process will shake out in the weeks, months and years to come with the primary, and in my opinion erroneous, assumption being that we can turn on a switch and watch in awe how a V-shape type of recovery materializes.
Far from it, it will be a slow process, and I am pondering how many businesses have the wherewithal to remain shut until that moment in time arrives where their re-opening is “permitted.”
With the major indexes heading for their best monthly gain in many years, thanks to reckless monetary manipulation, I am still astounded by the lack of understanding by investors about the challenges involved to restart the US economy.
Commented Wolfe Research Analysts:
“Our sense is that the liquidity-driven ‘melt-up’ could persist over the near term. Ultimately, however, extremely weak fundamentals should matter. Along this vein, we expect the state reopening process to be much slower than what’s currently baked into stock prices.”
Today, we saw reality kick in, as the Dow gave up an early 400-point gain and closed in the red, as did all major indexes, with the loser of the day being the Nasdaq.
The early tumble came from a report that Boeing faces a criminal and civil probe over the 737MAX production, which was followed by more bad news, like Dr. Fauci’s grim assessment of the Covid-19 dilemma:
“So, it’s not going to disappear from the planet, which means as we get into next season, in my mind it’s inevitable that we will have a return of the virus or maybe it never even went away. When it does, how we handle it will determine our fate,” Fauci commented overnight, adding that he was “almost certain” the virus will return in the winter.“
That caused the early short-squeeze to run out of steam, and the markets were forced to take the path of least resistance—down.
The Fed is on deck and scheduled to talk about interest rates and the economy tomorrow. For sure, it will be market moving, but which way?
