Markets Plummet as Red October Rattles Investors; International TTI Generates “Sell” Signal; Domestic TTI Settles Within Striking Distance

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

A slow deterioration of equity prices, which started last week, accelerated today with the broad markets plummeting, as the chart above shows. There was simply no place to hide and those investors, counting on the bond portion of their portfolios for safety, were disappointed as the 20-year bond ETF (TLT) dropped in sympathy with stocks bringing the YTD loss to over 10%.

Rising bond yields continue to be culprit causing uncertainty and extending this month’s losses while giving new meaning to the term “Red October,” The S&P 500 not only extended its slide for the 5th consecutive day but also fell below its 5-day M/A for the 4th session, creating doubt as to whether this level could serve as one of support.

The index has also reached a point that is only 20 points away from breaking through its 200-day M/A which, if broken, would very likely confirm more downside action and a return to bear market territory. What is concerning is that the magnitude of today’s correction, as opposed to the ones in February and March, happened in just one day.

Usually, you’d see some bobbing and weaving, along with a slow deterioration of prices, followed by more accelerated selling. Today, all happened at once which, to my way of thinking, could only mean 2 things:

  1. The sell-off was an outlier and simply overdone and is quickly followed by a rebound, or
  2. The bullish crowd just disappeared and computer algos will push this market lower and into bear market territory ending the current bullish cycle, which has only lasted this long due to the Fed’s QE and lower rates, both of which may now be a thing of the past

When looking at charts of the sectors that are fundamentally important for the economy, we see nothing but bearish trends in the following areas: Financials, Semiconductors, Home-builders, Autos, Materials, Copper, Lumber and credit markets. There is only one stock that appears to be holding up no matter what. This chart tells the story.

Our International Trend Tracking Index (TTI) went south again for the 4th day in a row and is now firmly entrenched on the bearish side of its trend line, thereby generating a “Sell” signal effective tomorrow.

The Domestic TTI just broke below its respective trend line today but only by a small margin. I will watch to see if the downward slide continues tomorrow but will for sure liquidate those positions that have triggered their trailing sell stops.

Be sure to see section 3 below for the exact positions of our Trend Tracking Indexes (TTIs).

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Extending The Losing Streak

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

The major indexes tried to get out of their foul mood by staging an early rally, which was rebuffed with the trend for the session being predominantly sideways. The S&P 500 not only extended its losing streak for the fourth day, but also bounced around its 50-day M/A leaving open the possibility that this might serve as a support level.

Keeping a lid on upward momentum were bond yields, which spiked again early on with the 10-year touching 3.26% before fading into the close at 3.20% and creating a bond rally. Despite this intra-session pullback, I think the cat is now out of the bag and higher rates and yields will be our future companions. That also means that these loftier yields, with bonds being perceived to be more risk-free than equities, will compete against them for investor dollars.

Of course, those having been invested in bonds during the lowest of rates are seeing plenty of red numbers, as bond prices got crushed with higher yields. Case in point is the widely held 20-year bond ETF (TLT), which finally bounced back today but still shows a YTD loss of -11.19%, hardly soothing for a “conservative” investment.

In the end, despite equities displaying some chaotic characteristics during this session, the major trend remains bullish based on our Domestic TTI (see section 3).

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Digging A Hole And Climbing Out Of It

Ulli Market Commentary Contact

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

The markets dug a deep hole early in the session only to stage a solid rebound mid-day with the Dow managing to crawl back above the unchanged line, while the S&P fell just short, but the Nasdaq clearly remained in the red by -0.67%. As a result, the Dow has now outperformed the tech sector for the 7th straight day.

Luckily for equities, the bond markets were closed in observance of Columbus Day, so rising bond yields, which were acting as the terminator for stocks last week, had no direct influence during this session, but their shadow clearly hung over the markets.

Other parts of the world were not so lucky. The major stock markets of Europe tumbled into the red with the Europe 500 Stock Index giving back -1.12% and closing at a low last seen in April, while the FTSE took top billing to the downside with -2.43%.

The widely held FANG stocks continued their sideways pattern but have broken below technical levels. The US dollar see-sawed by pumping and dumping but managing to hold on to small gains for the session.

Tomorrow, the bond markets will be open again, and nervousness prevails on Wall Street in anticipation if last week’s yield debacle will continue and thereby affect equities negatively.

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ETFs On The Cutline – Updated Through 10/05/2018

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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 , defined as those with an average daily volume of more than $5 million, of which currently 152 (last week 182) 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 October 5, 2018

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ETF Tracker StatSheet

https://theetfbully.com/2018/10/weekly-statsheet-for-the-etf-tracker-newsletter-updated-through-10-04-2018/

SPIKING YIELDS = HEADWIND FOR EQUITIES

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

Summing up the week best, was ZH with this final tally:

  1. Unemployment Rate at 49-year lows
  2. US Stocks – worst 2-day drop since May
  3. Small Caps, Nasdaq – biggest weekly drop in 7 months
  4. Small Caps – biggest 5-week drop since Nov 2016
  5. China (closed) ETF – biggest weekly drop in 7 months
  6. Semis – biggest weekly drop in 6 months
  7. FANGs – biggest weekly drop in 7 months
  8. Homebuilders – worst.losing.streak.ever…
  9. USD Index – best week in 2 months
  10. HY Bonds – biggest weekly price drop in 8 months
  11. IG Bonds – biggest weekly drop since Nov 2016
  12. Treasury Yields – biggest weekly yield spike in 8 months
  13. Yield Curve – biggest weekly steepening in 8 months
  14. Gold – best weekly gain in 6 weeks

The market slump continued with Homebuilders, SmallCaps, Nasdaq, the FANGs and Semiconductors all getting hammered to varying degrees with SmallCaps being the worst performer closely followed by the Nasdaq. To no surprise, the VIX spiked to over 17, a level which we have not seen since June.

The jobs report missed, as only 134k jobs were added vs. expectations of 185k. That was not too much of a surprise, as the hurricane had a major impact with 229k people not being at work due to bad weather. Offsetting this September weakness was the August upward revision from 201k to 270k.

The unemployment rate ticked lower to 3.7%, its lowest level in 48 years. More importantly, wages were rising 0.3% on the month or 2.8% on the year which, when combined with the low unemployment rate, created worries about inflationary impacts.

That in turn sent bond yields on another rally with the 10-year spiking to 3.24% intra-day before closing at 3.23%, a gain of almost 5 basis points. If this trend continues, equities are in for a major surprise during this already ‘red’ October, as rising yields will eventually spell the end of the bullish environment.

This may be just the beginning but, despite prevailing international weakness, the major trend in the domestic arena remains bullish for the time being.

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 10/04/2018

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ETF Data updated through Thursday, October 4, 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 +3.54% after having generated a new Domestic Buy signal effective 4/4/2016 as posted.

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