A Positive Ending To A Miserable Month/Year

Ulli Market Commentary Contact

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

Despite last week’s rebound and today’s green close, it simply wasn’t enough to wipe out the losses of a miserable year and an even worse December. While for 2018 the S&P 500 “only” fell -6.2%, its biggest yearly tumble in a decade, this month left a bitter aftertaste with the index dropping -9.2%, as bearish forces remained dominant.

Individual stocks fared far worse with Dow component Goldman Sachs, for example, being down some 35% YTD, however, all systemically important banks collapsed, despite reassurances of “fortress” like balance sheets. Bear markets simply don’t discriminate, which means that in 2018 no corner of the world escaped unscathed.

On Wednesday, Wall Street will be again fully staffed with traders eager to make buy/sell decisions. Sure, optimistic trade news with China could give the current rally more support, but for how long?

To me, the unanswered question, that will have the biggest market impact, is this one: If the Fed reverses its widely “blamed” policy error (hiking rates), will this result in further market declines due to total loss of confidence or form the basis for a new bull market?

Only time will tell.

Happy New Year!

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ETFs On The Cutline – Updated Through 12/28/2018

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 322 High Volume ETFs, defined as those with an average daily volume of more than $5 million, of which currently 44 (last week 43) 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 December 28, 2018

Ulli ETF Tracker Contact

ETF Tracker StatSheet

https://theetfbully.com/2018/12/weekly-statsheet-for-the-etf-tracker-newsletter-updated-through-12-27-2018/

A WEEK OF WILD SWINGS

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

I am certain that a lot of Wall Street traders are glad that this week, which gave a new meaning to the word “volatility,” is finally over. Despite only 4 trading sessions, a huge drop was followed by an amazing recovery, however, no clear directional tendencies became apparent as the chart above shows.

As I have repeatedly posted, these types of wild swings in both directions are the hallmark of bear markets, because you won’t find this type of extreme jaw dropping activity when we are in bullish mode. After a disastrous December, the major indexes finally managed a green weekly close with the S&P 500 recovering +2.9% but still being down -10% for the month. Ouch!

ZeroHege observed that today was a big fake out based on hope that more pension bids were coming but didn’t. Here are some highlights:

And once traders realized that this was just one giant fake out meant to force stops and squeeze shorts, they started buying… bonds, with the 10Y yield sliding as low as 2.7146%, the lowest since February 2018. And as the bond were bid, stocks tumbled losing all intraday gains, and turning negative.

Meanwhile, as it became clear that no real pension bid was coming, the selling returned, and stocks closed near session lows, with the Dow losing almost 400 points of gains and briefly dropping below 23,000 although the selloff was far more controlled than the liquidation puke observed on Monday.

At the end of the day, the Dow was the biggest loser, the S&P was modestly lower, while the Nasdaq closed just green thanks to a strong bid for the FANGs.

Meanwhile, on the economic front home sales crashed -7.7%, which was the biggest drop in four years. They slid -0.7% in November vs. a 1% expected increase confirming that the real estate downturn is alive and well.

Looking at the big picture, we can see that even the know-it-all usually calm Wall Street analysts are simply bewildered about these frantic price movements in the markets, which makes forecasting anything but a wild guess. Currently, there is no rhyme or reason to be part of this absolute uncertainty and insanity.

In my advisor practice, we will remain on the sidelines until this bear market has run its course rather than trying to be a hero and catch the proverbial falling knife. Our Domestic Trend Tacking Index (TTI) remains firmly entrenched on the bearish side of its trend line by a substantial -10.17%. Bearish tendencies may have a way to go, and we don’t want any part of it.

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 12/27/2018

Ulli ETF StatSheet Contact

ETF Data updated through Thursday, December 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: SELL — since 11/15/2018

 Click on chart to enlarge

Our main directional indicator, the Domestic Trend Tracking Index (TTI-green line in the above chart) is now positioned below its long-term trend line (red) by -10.64% after having generated a new Domestic “Sell” signal effective 11/15/18 as posted.

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A Late-Day Comeback

Ulli Market Commentary Contact

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

One market technician called yesterday’s massive rebound a sucker’s rally and for most of today, with the major indexes trading way down, his view seemed to be correct except, it was not over yet.

A powerful reversal during the last hour appeared to be a continuation of the quarter ending re-balancing by pensions plans (and a giant short squeeze) I mentioned yesterday. It pulled equities out of the doldrums, which ended in the green for the second day in a row, as the Dow staged a nearly 900-point turnaround.

The early plunge did not come as a surprise after economic confidence figures got smashed and the US jobs outlook crashed the most on record. December’s number dropped from 136.4 to 128.1 vs. expectations of 133.7 and slipped to its lowest level since July.

I expect this type of see-saw action to continue throughout the final trading days of this year, but I am pondering the question “what bullish forces might be left after the pension funds are done with their adjustments?”

We’ll have to wait and see but, right now, no matter how much lipstick you put on December, it is still a pig as this chart (courtesy of ZH) shows.

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Wiping Out The Christmas Meltdown Via A $64 Billion Buy Order

Ulli Market Commentary Contact

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

Equities finally managed to stage a long-overdue rebound from extremely oversold conditions but still leaving the major indexes far short of returning to bullish territory.

Getting things started were comments by President Trump yesterday attempting to calm the investing crowd after the pre-Christmas disaster. Words like “buy the dip,” “I have great confidence in our companies, they’re the greatest in the world and are doing well,” got an early rebound going, but that was not the main driver behind today’s surge.

The real firepower came from the U.S. Defined Benefit Pensions fund that needed to implement a “giant rebalancing out of bonds into stocks,” assumed to be the largest in history. Wells Fargo estimated about $64 billion in equity purchases were necessary during the last trading days of the quarter and year to accomplish that mission.

Here are some details:

For those who missed our Friday post on the topic, Wells explained where this massive rebalancing comes from: the huge, end-of-quarter buy order was precipitated by the jarring divergence between equity and bond performances both in Q4 and the month of December. The stocks in the bank’s pro forma pension asset blend had suffered a 14% loss this quarter, including about an 8.5% drop in December. Contrast this with a roughly +1.6% quarterly total return for the domestic aggregate bond index.

As a result of this need for massive quarter-end rebalancing, corporate pensions would need to boost their equity portfolios by as much as $64 billion into year-end.

With a lot of CTAs (Commodity Trading Advisors) and hedge funds having turned short, this was not a good day for them, as the short squeeze turned out to be the biggest since the Brexit. Ouch!

My view has always been that a bear market will allow for short positions, but only once it has been established. Right now, we are in the beginning stages, where increased volatility in both directions can wreak havoc with even the most thought out plans.

That’s why portfolio safety is rule number one. Being out of equities and in money market is the safest and most sensible place to be at this time.

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