Dow Scores 14th Record This Year; Smallcaps Collapse

Ulli Market Commentary Contact

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

While the Dow managed to score not only a green close but also its 14th record of 2018, the S&P 500 and Nasdaq were the weaklings of the session and slipped slightly below their respective unchanged lines.

In other parts of the world, the activity was more bearish as the China ETF FXI lost -2.42%, despite China markets being closed for the “golden week.” In Italy, the country with the worst NPL loans as I pointed out yesterday, the markets went haywire by first diving sharply, after which panic buying ensured, which brought the price back to unchanged, as this chart from ZH shows. It’s odd and certainly not the sign of a healthy and sound environment when erratic moves like this occur.

While the Dow was enjoying its rise to a new record, the same can’t be said for SmallCaps (SCHA), which got spanked again after having broken a major support line, which had been in place since April. The 200-day M/A looks to be in striking distance now, and it would not surprise me to see this sector move into bear market territory.

Looking at it a different way, there is a major divergence between the Dow and the SmallCaps, which simply translates to the former outperforming the latter by a wide margin. As the chart shows, this divergence just came into play around the beginning of July.

What that means is that some sectors have rolled over and upward momentum is no longer broad based as you can see here. Big caps are holding up well, which is why I increased our exposure to them back in August. We’ll have to wait and see if this weakness will spread to other areas as well. It’s too early to tell, if Small- and MidCaps are resembling the proverbial canary in the coalmine.

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U.S.-Canada NAFTA Deal Propels Markets

Ulli Market Commentary Contact

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

Right after the opening bells, the major indexes went into rally mode, as news of a surprise U.S.-Canada new NAFTA trade agreement pushed the S&P 500 within shouting distance of its intraday record. Finally, some good news on trade after months of haggling and infighting within the various parties.

The euphoric mood waned somewhat throughout the session with the Nasdaq giving back all early gains and slipping below its unchanged line, but the Dow and S&P, despite coming off their early highs, saved the day by closing in the green. But, SmallCaps had their worst day in over two months, so the rally was anything but broad.

Emerging markets were back in the spotlight, as not just the strong US dollar is wreaking havoc with their currencies but also a toxic mix of global tensions, rising US interest rates and now surging oil prices contribute to the overall misery. Take a look at this chart, which shows the YTD percentage change in oil prices in the various regions. Ouch!

India moved to center stage by announcing that it nationalized one of their banks caused by a surge in NPLs (non-performing loans), an unprecedented move that some analysts have put in the “panic” category. Of course, it’s well known that the leader of NPLs is Italy, which is in the middle of a collapsing banking system. But how do those two compare to the rest of the world? This chart below gives us the answer:

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ETFs On The Cutline – Updated Through 09/28/2018

Ulli ETFs on the Cutline Contact

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 366 High Volume ETFs ETFs, defined as those with an average daily volume of more than $5 million, of which currently 182 (last week 191) 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.

Take a look:

The HV ETF Master Cutline Report

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.

ETF Tracker Newsletter For September 28, 2018

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ETF Tracker StatSheet

https://theetfbully.com/2018/09/weekly-statsheet-for-the-etf-tracker-newsletter-updated-through-09-27-2018/

A Weak Close To A Positive Month

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

The major indexes struggled to find some footing today, but in the end hugged the unchanged line after vacillating above and below it throughout the session.

Geopolitical tensions from Italy were back in focus after the Italian coalition decided yesterday on an “in your face” attitude towards the EU by simply widening their regulated budget deficit, which I mentioned yesterday. The verbal fireworks continued today and will sure be headline news in the following weeks.

In Argentina, the Peso plunged to new record lows, as the government hiked a major interest rate to 65%. Ouch! All this despite promises by the IMF to increase its bailout package. This is just the beginning of further deterioration in the Emerging Markets arena with a domino effect being a likely outcome that eventually will impact the developed nations as well.

Domestically, the major indexes had a mixed September but a strong quarter with the S&P 500 rising some 7%, its biggest quarterly advance sine 2013. This made it easy for investors, who tend to have very short-term memories, to not only forget the sharp market corrections of February and April but also appreciate the fact that US stocks are still outperforming the world’s indexes.

Makes you wonder how long that path can continue, especially given the fact that bonds had a bloodbath in September with yields ending at a much higher level than when they started the month. Rallying equities and rising bond yields are not a combination that will last for long.

Adding to that uncertainty was that true economic data points are decoupled from equity prices as this chart shows. Will the month of October be the big equalizer, as we’ve seen in the past? Who knows, but I am glad that we have an exit strategy in place, just in case reality bites the bulls in the butt.

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 09/27/2018

Ulli ETF StatSheet Contact

ETF Data updated through Thursday, September 27, 2018

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.

  1. 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 4/4/2016

 Click on chart to enlarge

Our main directional indicator, the Domestic Trend Tracking Index (TTI-green line in the above chart) is positioned above its long-term trend line (red) by +3.96% after having generated a new Domestic Buy signal effective 4/4/2016 as posted.

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Slipping Off The Mid-Day Highs

Ulli Market Commentary Contact

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

An early rally was rebuffed mid-day when bullish momentum faded, and the indexes headed south. For a while, it looked like we’d be ending up in the red again, but last hour buying halted the S&P 500’s 4-session skid, and we closed modestly in the green.

Some of this weakness was a hangover from yesterday; more specifically the Fed’s decision to stay the course on hiking interest rates. Some economic data released this morning did not help the bullish theme, such as Pending Home Sales dropping 1.8% MoM, which was just about 4 times worse than expected and reaching their lowest level since Oct. 2014.

This was followed by a surge of the Trade Deficit, which ballooned to $75.8 billion in August vs. expectations of $70.6 billion. In historical context, this is close to the all-time 2008 record high deficit of $76,025 billion. You think this might add some fire or urgency to the current trade war talks?

Italy made headlines today, as they defied Europe’s regulation on budget deficits, which are pegged to a maximum of 2% of GDP. However, the Italian governing parties agreed on a 2019 budget deficit of 2.4%, clearly above the agreed upon ceiling setting up a potential skirmish with an unknown outcome.

The immediate consequence was a drop in the Euro and a surge in the US Dollar, which extended its bounce back to 2-week highs. US bond yields were not affected and dropped slightly.

Tomorrow is the last trading day of September, and we’ll be staring October in the face, a month which has demonstrated in the past that it can be a bull market killer. It does not necessarily have to turn out that way, but in my view, it pays to be prepared by having an exit strategy should a major hiccup occur.

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