ETF Tracker Newsletter For October 25, 2019

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ETF Tracker StatSheet          

You can view the latest version here.

SCRAMBLING AND TOUCHING NEW ALL-TIME HIGHS

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The hope that Amazon’s earnings report would provide the firepower to propel the markets into record territory proved to be false, as the behemoth showed its first profit drop in two years, causing its stock to subsequently take a dive of some 8% in yesterday’s afterhours trading.

With that horse being out of commission, traders and algos needed a new driver to push the slow crawl of the indexes towards all-time highs into overdrive. That turned out to be the latest headlines promoting that “US and China are near completion of some aspects of the phase one trade deal that was supposed to be all papered last week.”

It worked, and the S&P 500 broke through overhead resistance in pursuit of the all-time intra-day level of 3,027.98, which it failed to conquer, but it managed to take out the previous closing high of 3,025.86 for a few minutes before pulling back. Giving an assist was the biggest short-squeeze in 6 weeks, which has been helping markets without many interruptions since the beginning of September.

For sure, any positive signs of either the existing US-China tariffs being suddenly dropped, or the actual signing of the phase 1 trade deal, will send global stocks higher.

Today’s move only required the S&P to gain less than 0.5% to touch new all-time highs. This happened in the face of rising bond yields, which gave the S&P 500 (SPY) the edge (+0.41%) over its low volatility cousin SPLV, which slid for the second day (-0.57%). Still, for this current ‘Buy’ cycle, SPLV remains the dominant force by having gained +12.76% vs. SPY’s 9.67%.

As far as market participants is concerned, next week’s Fed meeting on interest rates is a shoo-in and already a foregone conclusion. I only expect a strong market reaction, if they don’t cut (negative), or if they cut more than expected (positive).

Never mind that the US budget deficit for fiscal 2019 came in at almost $1 trillion ($984.4 billion to be exact), which was a whopping increase of 26.4% over the prior year, nor that US Economic Policy Uncertainty has soared to all-time record highs. Stocks are in their own world and appear to be climbing a wall of worry.

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 10/24/2019

Ulli ETF StatSheet Contact

ETF Data updated through Thursday, October 24, 2019

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 +3.94% after having generated a new Domestic “Buy” signal effective 2/13/19 as posted.

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Seesawing—But Limping Higher

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Yesterday’s last-minute pump, to get the major indexes to a green close, finally made sense, when it became known that the Fed had injected $134 billion in liquidity in the repo markets. This event sparked a furious last hour rally, which ZH charted like this.

As the table shows, the increase in liquidity availability for overnight repos was increased from $75 billion to $120 billion, while term repos jumped from $35 billion to $45 billion. The overnight repo was the biggest ever, which again begs the questions “what is broken?” and “will it go exponential?”

Added ZH:

The only possible explanation, is someone really needed to lock in cash for month end (the maturity of the op is on Nov 7) which is when a “No Deal” Brexit may go live, and as a result one or more banks are bracing for the worst. The question, as before, remains why: just what is the source of this unprecedented spike in liquidity needs in a system which already has $1.5 trillion in excess reserves? And while we await the answer, expect stocks to close pleasantly in the green as dealers transform their newly granted liquidity into bets on risk assets.

These are serious issues with potentially significant repercussions for equity markets, which so far have simply shrugged off this event. In my view, this will not end well…

However, for the time being, the major indexes continued their aimless meandering around their respective unchanged lines with a bullish bias, as headline earnings reports provided a mixed picture.

MarketWatch featured these highlights:

Microsoft’s stock surges as big earnings beat prompts analysts to boost price targets

Twitter stock tumbles 20% after company says advertising bugs weighing on earnings

Comcast’s stock surges after profit, revenue rise above expectations

Nokia’s stock plummets toward worst day in 19 years on heavy volume after profit warning

On the economic side, things did not look encouraging with US New Home Sales slowing in September, as prices plunged to their lowest since 2017. Not to be outdone, the Durable Goods report showed that orders tumbled last month, while Business Investment contracted the most since Trump’s election.

Still, it looks to me that traders and computer algos are eagerly awaiting Amazon’s earnings, due out after the close today. If expectations are solidly beat, this may provide enough optimism/firepower to propel the indexes into all-time high territory, which is not a big deal, since we have been hovering within striking distance (around 1%) for a while.

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Chopping Around Key Technical Levels

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Despite disappointing results from Boeing and Caterpillar, the markets managed an early ramp higher but were not able to sustain it, as a slow deterioration of upward momentum pulled the major indexes back below the unchanged line.

Traders had one eye on the Brexit developments, where the latest parliamentary vote eased concerns about the UK busting out of the EU without a deal by October 31st.

Looking at the big picture, this week is all about earnings with next week’s highlight being the Fed meeting on interest rates. Even though 82.7% of S&P companies have delivered results above expectations, let’s not forget that these expectations have been sharply reduced.

Companies are further justifying these numbers by elaborating that “how we did this quarter isn’t as important as what we expect the future to hold.” Yeah, right.

With the Fed’s money printing going into overdrive at the rate of some $60 billion a month, it’s no wonder that Central Banks around the world have been accumulating gold at a record pace. Today, we learned that my home country, Germany, has joined the party by openly buying gold into its reserve holdings—for the first time in 21 years.

That is not surprising, as Germany has more experience with the awful effects of too much money printing than any other industrialized nation. If you are not familiar with that part of history, please read more about the Weimar Republic.

Combining the ECB policies along with Deutsche Bank’s (one of the largest derivatives holders in the world) precipitous demise, fears of a looming financial crises have become a possibility for the Germans and have subsequently caused this renewed interest in gold.

Here in the US, the liquidity scramble in the overnight repo market continues, as the latest operation was oversubscribed 5.9 times. As ZH pointed out, it simply means that the demand for the Fed’s permanent liquidity injection is increasing with every operation.

How long can that go on before we go exponential? And just as important, how long can this go on before equity markets realize that not all is well with the financial plumbing?

Be that as it may, at least for today, the major indexes moved aimlessly and looked to end up at their respective unchanged lines when a last-minute pump assured a green close.  

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Touching The Glass Ceiling—And Running Out Of Steam

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

It sure was a day consisting of mixed reports and, as much as I searched, I could not find a reason that might have supported the early rally. Of course, the latest earnings reports took center stage, but it seemed the disappointing results from McDonalds, Travelers and UPS were overpowering the positive ones.

With the markets failing to break out, after having reached the upper limit of their 3-month trading range, this may change when tech behemoth Amazon releases its results on Thursday. Analysts are looking for “a solid beat” and a subsequent move of the major indexes not just above the current glass ceiling but also into new record-high territory.

With traders’ focus being on a breakout, almost no one talks about far more concerning issues, namely the continued stress, strain and funding squeeze in the overnight lending markets (repos). It’s a very complex issue that boils down to the fact that banks have trouble securing funds due to a shortage in liquidity.

That makes me go hmmm… The Fed announced last week that they will inject funds at a rate of $60 billion per month (but they don’t call it QE) via the purchase of T-Bills, yet today’s repo was oversubscribed 5.5 times. This confirms that participants are scrambling to convert their “safe” assets into dollars as fast as possible, as ZH explains. That leaves this question:

Why are banks still so desperate for liquidity even though the Fed has now made clear the Fed’s balance sheet will expand to accommodate all reserve needs, and why do they so stubbornly refuse to approach the interbank market for their funding needs?

In short, what do they know about the banking system that we don’t?

This monetary crunch, if it continues, may very well get exponentially worse, at which time, there will be no way that the sleepy equity bulls will not have a very rude awakening.

The “smart money” may have already woken up to that fact, if this chart from Bloomberg is any indication.

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Edging Higher; S&P Reclaims The 3,000 Level

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The markets edged higher to start the week with Boeing being a drag on the Dow capping the gains by some 100 points. The S&P 500 managed to finally hold above its 3,000 level but is now homing in on overhead resistance lurking at around 3,020. Then index also has failed to close the breakaway gap (blue circle), which means a retracement will be in order at some time.

However, for right now, the computer algos are chasing headline news and front running any suggestions that Beijing and China have successfully laid the groundwork to solidify a solution to the long-running trade disagreement.

Assisting the bullish theme was another short-squeeze, which helped the indexes to stay in the green and kept the mood upbeat.

In the meantime, the Brexit saga continues full force with UK’s PM Johnson experiencing a setback, which traders liked, since some are of the opinion that a Brexit without a trade agreement could disrupt global markets even further.

On the earnings front, we learned that 75 of the S&P 500 companies have reported with 82.7% showing better-than-expected results. Of course, the bar has been lowered considerably, but when it comes to headlines, a “beat is a beat.” This weak, we have 130 more candidates presenting their report cards, and we will have to see if the above numbers hold up.

On a personal note, I’d like to thank all of you who have emailed and wished me a speedy recovery from my eye surgery last Friday night. It was successful, and I thank you for your kind words.

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