ETF Tracker Newsletter For July 12, 2019

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ETF Tracker StatSheet          

You can view the latest version here.

BANKING ON A FED RATE CUT

[Chart courtesy of MarketWatch.com]
  1. Moving the markets

Yesterday’s rally continued this morning and accelerated throughout the session, as traders were now convinced that a rate cut by the Fed is a sure thing, so front running was the name of the game.

Since Fed chair Powell’s 2-day congressional testimony did not include any negatives, but rather words like the U.S. economy is in a “very good place,” traders felt invigorated that a cut was coming, so the bullish theme continued.

Even a stronger-than-expected U.S. inflation print in core producer prices could not put a dent in current enthusiasm, with further support coming from hopes the global economy will slow even more, forcing the Fed’s hand for a possible 0.5% reduction in rates.

One analyst summed it up like this:

This is one of those mornings where bad news is good news for stocks, while good news is bad news for bonds… or in other words, any news is good for stocks.

The bullish view did not carry through all investment arenas. Chinese, European and Small Caps all lost for the week. Bond yields suffered, especially in Germany where the 10-year spiked the most since the middle of 2017, as prices collapsed.

Same here in the U.S. with specifically the 30-year yield jumping to 7-week highs, as the dollar corrected back down after its surge following the payroll announcement.

Things appear very uncertain and confusing, when looking at the big picture, which led BofA to release the following statement:

“…we anticipate an “overshoot” in credit & equity prices in coming months, followed by an overshoot in gold (US$ devaluation) before big H2 top in asset prices (as bond bubble pops & policy impotence visible).”

That prompted ZeroHedge to update this chart, which suggests that a picture is worth a thousand words.

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 07/11/2019

Ulli ETF StatSheet Contact

ETF Data updated through Thursday, July 11, 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 +7.78% after having generated a new Domestic “Buy” signal effective 2/13/19 as posted.

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Hitting New Milestones

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]
  1. Moving the markets

While the Dow managed to conquer its new milestone marker of 27,000 with relative ease, and close above it, the S&P 500 struggled with its record 3,000 level. It managed to trade above it for a brief period but fell just short of defeating that hurdle by ending the day at 2,999.91.

It was another day of trading in a wide range, as an early rally lost steam with equities taking a sudden dive towards the unchanged line after Trump tweeted his dissatisfaction with China’s efforts about the trade truce.

Market disappointment was short lived with the rally resuming only to lose steam again with the indexes summersaulting but this time below the unchanged line. This was due to a poor bond auction, as the 30-year yield exploded to 6-week highs. However, as if by magic, the third attempt to take out the old highs was accompanied by some staying power with only the Nasdaq ending slightly in the red.

Some pain for Fed head Powell’s dovish ideas arrived in form of a hotter than expected core inflation rate, which rose 0.3% from the prior month to 2.1%, which is not just the most since January 2018 but also above the Fed’s 2% target.

How does a higher inflation rate compute with the intention of lowering interest rates? Not very well, in my opinion. The Fed will have some hard decisions to make when it meets later this month.

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Fed Pledges To ‘Do Whatever It Takes…’

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]
  1. Moving the markets

The markets opened higher, pulled back but maintained its presence safely above the unchanged line. The S&P 500 succeeded in briefly crawling above its 3,000-milestone marker, retreated in a hurry but managed to close in the green, as did the other 2 major indexes. The Nasdaq fared the best by sporting a +0.75% gain.

All eyes were on Fed chief Powell, who acknowledged that the U.S. “is suffering from a bout of uncertainty caused by trade tensions and weak global growth,” but he promised to “do whatever it takes” to prop up the economy. Of course, traders took that as a sign that lower interest rates are on deck, which helped the bullish cause for the day.

The Fed illuminated things even further by stating that they will “act as appropriate to sustain the expansion,” which lent further support to those hoping for a rate cut. Powell also kept repeatedly emphasizing the effect of trade tensions and a slower growth around the world.

Again, the entire scenario appears to be backwards to me. Here we have the S&P 500 hugging the 3,000-milestone, yet Powell indicates that rate cuts are on the horizon. To be clear, rate cuts are usually implemented to support a sagging economy and not pump up markets.  

On the other hand, it could very well be that, as I posted before, the economy is in such bad shape that lower rates are required to keep it alive, yet the stock market (the ‘dumb’ money as opposed the bond market representing the ‘smart’ money), is as usual the last one to get the message.

When will these jaws of reality finally snap shut?

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Waiting For The Fed

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]
  1. Moving the markets

An early slide managed to gain some traction, followed by a small rebound that had the S&P 500 hugging its unchanged line throughout most of the session, before a last-minute pump pushed the index into the green by a tiny margin.

The outlook for interest rate reductions later this month has become clouded, thanks to last week’s stronger than expected June jobs report, but Wall Street traders still are clinging to hope that a 0.25% cut will materialize.

While the whisper number was a 0.5% reduction, which had been largely priced in, it makes anything less question traders as to the success of such an effort. Remember, Wall Street is spoiled and addicted to lower rates, without which a continuation of the bull market becomes questionable. We saw the result of a disappointing Fed by the market reaction last year.

In the end, the markets did nothing and may not move much in either direction until the Fed clarifies its policy. With this having been a relatively quiet day, ZH decided to post the current S&P performance when overlaid on the 1987 market debacle.  

I can’t wait to see how that will turn out.

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Questioning The Anticipated Rate Cut

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]
  1. Moving the markets

All session long, the major indexes were stuck below their respective unchanged lines, as uncertainty about the much anticipated and expected rated cut by the Fed later this month kept equities in check.

After all, we are only a few steps away from all-time highs, traders believe we are in a strong economic environment, despite evidence to the contrary, and want a rate cut so that stocks can continue to rise ad infinitum. The July rate-cut odds remain at 100%, as this chart shows.

Besides rate cut hopes being questioned, all eyes are on Fed chair Powell on Wednesday when he testifies before Congress on the state of the US economy as well as monetary policy. He will then also speak before the Senate on Thursday, but most likely his speech will be a repeat. Nevertheless, every one of his words will be dissected to analyze what he really meant to say.

In the stock arena, Boeing proved to be a drag on the Dow, due to the Saudis cancelling a $5.5 billion order, while Apple suffered as well, after an analyst downgraded the company from ‘neutral’ to ‘sell.’ Ouch!

With all the hype surrounding the rate-cut scenario, I wonder what will happen to equities if the Fed disappoints and does nothing? Consider, there is no Fed meeting in August, so the wait till September could give the bears a reason to do some serious chest pounding.

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