ETF Tracker Newsletter For January 31, 2020

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ETF Tracker StatSheet          

You can view the latest version here.

SLAMMED BY THE VIRUS

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Even Amazon’s strong quarterly results, and its subsequent 9% jump in stock price, could not stem the slide, as the ongoing coronavirus epidemic continued full force, with travel and trade disruptions now becoming a more real threat to economic growth prospects.

Yesterday’s rebound of the indexes now appears to have been a dead-cat-bounce, as a sea of red numbers dominated computer screens throughout the world. Beijing so far has reported over 9,600 cases of the virus with a death toll of 213. These are only the official numbers, and, by today’s market reaction, it appears that more bad news is expected over the weekend.

Whenever markets are subjected to the unknown, pullbacks are the usual reactions, especially when considering the relentless levitation of the past few months. At the same time, some analysts are considering this to be “a full valuation” market, which can contribute to corrections as well, especially when the bond market continues to show the kind of decoupling I posted about yesterday.

Then the CDC (Center of Disease Control) held another press conference during which it reiterated, several times, that the risk to the public from the coronavirus is low, but they forgot to mention that the risk to current market levels is high.

All eyes are now on China, whose markets will re-open on Monday after the weeklong Lunar Holiday closure. In the meantime, entire Chinese cities and factory hubs are on lockdown with some 50 million people being confined to their homes.

One look at the big picture, namely the driver for this bull market, also known as the Fed’s balance sheet, we see a different reason for this sell-off emerge, which is the lack of expansion of this very balance sheet, as this chart makes abundantly clear.

In the absence of this balance sheet picking up some upside momentum, and the coronavirus being contained, we could potentially see this bull market come to a screeching halt.

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 01/30/2020

Ulli ETF StatSheet Contact

ETF Data updated through Thursday, January 30, 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 +6.74% after having generated a new Domestic “Buy” signal effective 2/13/19 as posted.

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Upbeat Earnings Overpower Virus Concerns

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Right after the opening bell, the markets headed south following the global negative sentiment caused by a sell-off in Asia, as coronavirus issues again fanned fears of slowing economic growth worldwide.

Concerns about the epidemic’s impact first overpowered upbeat earnings news from Microsoft and Tesla, with airline stocks falling due to the travel disruptions, as the virus spread. Chinese news outlets reported of 7,700 infections with at least 170 deaths.

China’s stock markets will remain closed till next Monday, but concerns are increasing that those markets will head south as investors there will have to catch up with the reality of the virus and its impact.

The WHO (World Health Organization) finally named the virus outbreak, which originated in China, a “public health emergency of international concern.” That kept downward pressure on stocks, although they managed to come off their lows of the session, rebounded in the last hour and squeezed out an unexpected green close.

As we’ve seen many times in the past, a short-squeeze provided the ammo for the last hour ramp, which made sure that, with one trading day to go, the Dow is back in the green for the year. We’ll find out tomorrow, if it closes the month on a positive note.

In the meantime, the decoupling between stocks and bond yields continued unabated.

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Going Nowhere

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

In the end, today was nothing but one gigantic roller coaster ride, as an early rally lost steam, then found some fresh upward momentum, which was all given back at the close.

Maybe the early pump was the result of Apple’s blow-out earnings announced yesterday after the close, but it sure had no staying power with worldwide markets, as represented by the Global Dow, suffering as well.

In the meantime, the coronavirus deaths are spiraling higher with new cases being reported every day. Even Fed chair Powell, after leaving interest rates unchanged, commented that they are monitoring the effects of the virus and its potential for disrupting the global economy:

“It’s a serious issue. There is likely to be some disruption of activity in China and probably globally,” he told reporters, unprompted, in a news conference after the central bank’s first rate-setting meeting of the year. “We’ll just have to wait to see what the effect is globally.”

These virus issues are sure to stay with us for a while with the unanswered question remaining: Will the potential fallout be severe enough to unravel this bullish trend? It’s possible, since it does not look like the contagion can be contained within a short period of time.

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Climbing Out Of A Hole

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Despite coming off the intra-day highs at the close, the major indexes managed to climb out of hole, and close in the green for the first time in the past three trading sessions, although a major short-squeeze gave an assist in that effort.

Coronavirus fears subsided a little, as China appears to have taken serious actions much faster than a few years ago, when the SARS virus in 2003 created a mortality risk of +10%, while the current outbreak lies in the 2-3% area.

The focus also returned to the earnings season with Apple being on deck after today’s close. Companies are beating estimates by 5% so far, the best beat rate since 1Q19, according to MarketWatch.

Some headline chatter, that a vaccine was being produced in Hon Kong, was the original catalyst to get the bulls back on track, but who knows how much truth there was to that story. However, ZH pointed out correctly that “waiting at least four months for any vaccine will not stop a collapse in global supply chains, if this virus continues to spread like it is.”

That simply means, we must remain vigilant and be prepared that a major directional change remains a possibility.

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Facing A Sea Of Red

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

As was no surprise, more fallout from the coronavirus over the weekend made its presence felt with all markets showing red numbers. Again, given the relentless melt up since October, a correction was way overdue, and this one occurred as black swan event by coming out of nowhere and resulting in the first S&P 1%-plus loss in 76 days.

The events and subsequent market reactions were captured in this chart, with the investing crowd having now become increasingly concerned about the consequences of this virus, not only due to the obvious economic impact but also due to the severe travel restrictions involved.

The attempt to halt the spread of the virus may require more drastic measures, as the death toll had risen to more than 80 with nearly 3,000 confirmed cases of infections. Obviously, this event has taken center stage, but investors will also focus on the remainder of the earnings season, with nearly half of the Dow components being set to report results this week.

For sure, if signs emerge that the coronavirus has been contained, a huge relief rally will take center stage. If it isn’t, we will see volatility be our companion for a while, with the unanswered question being: Will this be a simple short-term correction, or the beginning of the end of this bullish cycle?

We will find out at some point and take evasive action, should the latter occur.

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