1. Moving the markets

World markets joined in unison by selling off with weekend news about the coronavirus continuing worries that global economies will not escape unscathed and take a hit of unknown proportions.

Sure, news media and markets tend to overreact, but the negative virus effects can’t be denied, as the struggle with containment policies and massive unknowns seem to get worse.

It’s no surprise that markets are feeling nervous this morning, given the known facts, which analyst Bill Blain summarized as follows:

The economic damage in terms of cancelled tourist trips to Asia and vice-versa, empty container ships, global supply chain breakdown shuttering factories across the globe, commodities tumbling, raising fears of mass defaults as just-in-time manufacturers fail to make interest payments is clear.

He went on to elaborate:

This crisis comes at the top of massive bubbles in stocks and bonds, fueled by 10-years of accommodative monetary experimentation – just at a time when the global monetary authorities are increasingly understanding the urgent need undo the unintended negative consequences, end QE, to normalize interest rates and take the pressure out of asset bubbles.

Forget about normalizing interest rates, it will be the opposite with bond yields crashing this morning, as the 10-year dropped some 10 basis points to below 1.40%. Considering the above, I believe the Central Banks will go all out and provide further “accommodative” policy support meaning yields will be heading towards the zero bound, as is the case in many developed countries.

As ZH points out in the above chart, a break below this “tipping point,” increases the probability to more than 50% of the Fed cutting back rates to 0%.

Along those lines, we may very well witness a well-known mantra come into play, set in motion by former ECB president Draghi, for the Fed to do “whatever it takes” to avoid an economic breakdown.

In the end, for us trend trackers, the only things that matter are: Is the major trend is still intact and/or have any sell stops been triggered?

For right now, the answer to both is no (see section 3 below), so we will continue to hold until either one of these two conditions come into play.

Despite today’s snapping of complacency, it’s also noteworthy that the S&P 500 closed today at the same price it had when the month of February started and remains within 5% of its all-time highs.

ETF Data updated through Thursday, February 20, 2020

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 02/13/2019

Click on chart to enlarge

Our main directional indicator, the Domestic Trend Tracking Index (TTI-green line in the above chart) is now positioned above its long-term trend line (red) by +8.45% after having generated a new Domestic “Buy” signal effective 2/13/19 as posted.

1. Moving the markets

With the effects of the coronavirus on everyone’s mind, China felt obliged to assure the world that it will take measures to help virus-stricken businesses by identifying weak links in supply chains. That was enough to get a rebound started with the S&P 500 and Nasdaq promptly scoring new intra-day all-time highs.

At the same time, the Chinese claimed that the rate of new cases has allegedly started to slow down creating optimism that the much-feared trade and travel disruptions may not be as bad as assumed, but the WHO still has recommended caution.

Helping the rebound was the release of the Fed’s minutes indicating that officials think that the economy appeared stronger in late January than had been expected. As a result, interest rates were kept unchanged, although concerns were voiced about the threat of the coronavirus, not just in China but globally as well.

Looking at the big picture, domestic equities have kept their bullish trend intact this month, on one hand helped by positive earnings reports while, on the other, being neutralized a tad as global growth has slowed due to the effects of the virus, the full impact of which is still to be felt.

However, right now, the bullish theme continues unabated.