Turkey Turmoil Returns; A-Dead-Cat Bounce Dies

Ulli Market Commentary Contact

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

I felt that yesterday’s rebound had the smell of a dead-cat-bounce and, based on today’s carnage, that seems to have been accurate—at least for the time being. Despite assurances to the opposite, the “C” word, as in contagion, was suddenly on investors’ minds, as concerns about Turkey’s currency crisis and US/China trade tensions made their presence felt.

The damage was not limited to equities but also to energy, which was the worst performing sector in the S&P with crude oil getting pounded at the rate of over 3%. The major indexes, while off to a poor start after the opening, managed to limit some losses by crawling back but not reaching the unchanged line.

Globally, the outcome was similar with stocks not just falling to 6-week lows but also breaking below major averages, which affected our Domestic TTI by confirming that a new “Sell” signal indeed has been triggered. More in section 3 below.

Contagion is a distinct possibility as a result of the fallout from Turkey’s currency destruction, which already has affected the European banks and, which are now in bear market territory meaning they have come off their highs by more than 20%.

Taking this a step further, stocks of GSIBs, also known as Globally Systemic Important Banks, have dropped 23% off their highs with no end in sight. Remember, these are banks that must be supported by governments at all costs, or things may turn real ugly very fast—economically speaking that is.

Even the VIX appeared to have woken up from a summer snooze by spiking to 17 but settling back down to the 15 area. Benefiting from this wild trading day were interest rates, which dropped as the 10-year bond yield settled down 3 basis points to 2.86%.

As I pointed out yesterday, only a few US banks have direct involvement in Turkey, so this is currently viewed only as one more addition to global uncertainties, of which there are plenty. I don’t think this will simply go away or be resolved quickly, so we must be alert to this being only one domino that can have serious effects on the European banking system and by extension, US banks as well.

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Shaking Off The Turkish Crisis; Equities Rebound

Ulli Uncategorized Contact

[Chart courtesy of MarketWatch.com]
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For sure, the Turkish crisis has not been resolved, but it merely paused, as the emerging markets’ exchange rates rallied and had their best day in 3 weeks as this chart shows. ZH commented:

Of course, all eyes were on the Lira as it rallied back up to unchanged from Friday’s close… After its biggest single-day loss ever, the lira rebounded most since 2001…

So, the theme of the day that “the lira is fixed” was enough to bring back the bulls to push the major indexes out of yesterday’s doldrums and past last Friday’s closing prices. Sure, with nothing having been resolved in the emerging market arena, this rebound could very well turn out to be a dead cat bounce.

Of course, we won’t know for sure until more time passes, but with the US dollar’s relentless push to new cycle highs (made today), it’s questionable in my mind that emerging nations with dollar denominated debt can dig themselves out of the current hole when their currencies are heading south almost daily.

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Turmoil in Turkey Troubles Markets

Ulli Market Commentary Contact

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

Despite the US not having much direct financial exposure in Turley, its ongoing troubles did stop investors in their tracks. That simply means risk assets, such as equities, fell out of favor today, and the major indexes headed south wiping out some early gains and ending in the red.

After all, no direct exposure does not mean, the US is isolated—far from it. In the simplest terms, these days most countries are connected at the hip. For example, European banks are heavily exposed to Turkish debt and in turn, US banks are holders of European debt. If any domino falls, the subsequent effect will surely travel across the Atlantic in a hurry.

The Turkish Central Bank went all out and declared to provide “all the liquidity the banks need,” but fell short of announcing a hike in interest rates. So, the lira continued to tumble, and raised concerns that this could ripple through the emerging markets economies first, and then who knows who’s next.

Emerging market currencies got pummeled again as the US Dollar climbed relentlessly for the 3rd day in a row to spike to its highest since June 2017. This also affected commodities with DBC losing -0.53%.

With the US/China trade wars having been shoved in the background for the moment, but still very much alive, and the emerging markets pandemonium in full swing, we seem to be going through a crisis phase, which could keep equities in check until a more positive theme develops. On the other hand, it is entirely possible that these current events, along with subsequent developments, can spell the end of the this very extended market cycle.

Since no one has the answer, we’ll go along for the ride until our Trend Tracking Indexes (TTIs) give the signal to step aside.

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ETFs On The Cutline – Updated Through 08/10/2018

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 165 (last week 175) 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 August 10, 2018

Ulli ETF Tracker Contact

ETF Tracker StatSheet

https://theetfbully.com/2018/08/weekly-statsheet-for-the-etf-tracker-newsletter-updated-through-08-09-2018/

 TURKEY RATTLES THE EQUITY CAGE

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

As I mentioned yesterday, “domestic equity markets have note priced in any long-term consequences of a prolonged trade war with China, reeling emerging markets and European banking problems.” This came true today at least regarding one emerging market, namely Turkey, which has been dealing with a mounting currency crisis for quite some time.

The Turkish Lira plunged to a record low of 6.3005 per dollar making it the worst performing emerging market currency in 2018, while their 10-year bond yield catapulted to a new record high of 20.67%. The Lira is down 20% for the week and 40% YTD. Fears of contagion spread in a hurry, as mostly European banks have some 40% exposure of the Turkish banking sector assets.

Even though US banks have only limited involvement, this kind of international turmoil is bound to send shivers around the world and waking up investors to the fact that all may not be well. After all, no country is isolated enough to disregard and not be affected by events in global economies and/or foreign currencies, especially if the latter just had their worst week since 2011.

That’s all it took to put the bears in charge and south we went. Domestically, the major indexes lost about 0.75% and managed to stage a comeback late in the session, which was not enough to produce green numbers.

Not helping matters was volatility in Russian markets with the Ruble dropping some 5% to 27-month lows against the US dollar, after their stock indexes dove as much as 9% on Thursday. This was the result of newly announced US sanctions.

With all the currency destruction around the world, the US dollar benefited and surged for the week, while the 10-year Treasury yield dropped 6 basis points today to end at 2.87%, as the flight to safety was on.

I just don’t believe that this is the end of the emerging markets currency destruction. I am sure there will be more fallout to come. The questions are: “How far will it spread and to what degree will equity markets be affected?” “Is this just an outlier, and will we be back to ‘normal’ next week?”

Unfortunately, we will have to wait for the answers to not only develop but also be reflected in our Trend Tracking Indexes (TTIs) before taking evasive action.

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 08/09/2018

Ulli ETF StatSheet Contact

ETF Data updated through Thursday, August 9, 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 +2.94% after having generated a new Domestic Buy signal effective 4/4/2016 as posted.

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