One Man’s Opinion: The World Is Becoming Desperate About Deflation

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By Vitaliy Katsenelson

The Great Recession may be over, but eight years later we can still see the deep scars and unhealed wounds it left on the global economy.

In an attempt to prevent an unpleasant revisit to the Stone Age, global governments have bailed out banks and the private sector. These bailouts and subsequent stimuli swelled global government debt, which jumped 75%, to $58 trillion in 2014 from $33 trillion in 2007. (These numbers, from McKinsey & Co., are the latest, but it’s fair to say they have not shrunk since.)

There’s a lot about today’s environment that doesn’t fit neatly into economic theory. Ballooning government debt should have brought higher — much higher — interest rates. But central banks bought the bonds of their respective governments and corporations, driving interest rates down to the point at which a quarter of global government debt now “pays” negative interest.

The concept of positive interest rates is straightforward. You take your savings, which you amass by forgoing current consumption — not buying a newer car or making fewer trips to fancy restaurants — and lend it to someone. In exchange for your sacrifice, you receive interest payments.

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ETFs On The Cutline – Updated Through 09/08/2017

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Below please find the latest High Volume ETFs 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 277 (last week 284) 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 8, 2017

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ETF Tracker StatSheet

https://theetfbully.com/2017/09/weekly-statsheet-etf-tracker-newsletter-updated-09072017/

A SLIPPERY WEEK

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

Last week’s upward momentum slowed, and the major indexes limped lower, although by a modest amount with the S&P 500 surrendering -0.65%. All eyes were on hurricane Irma, which threatens to make landfall in Florida sometime this weekend, and it is considered to be a “life-threatening situation.” Not helping matters was rumbling about cancelling the debt ceiling altogether and more news about “evil” N. Korean intentions.

For equity ETFs it was a mixed day, as the Nasdaq pulled back the most causing Semiconductors (SMH) to lose -1.08%. Emerging Markets (SCHE) occupied second place with -0.59%. Ending up in the green, not just for the day but also for the week, were Transportations (IYT) with +0.40% and MidCaps (SCHM) with +0.25%. Most others hovered around their respective unchanged lines by small percentages either above or below it.

Financials (XLF) were the loser of the week with a break to the downside of their widely followed moving averages (50-day, 100-day and 200-day). The VIX rose on a weekly basis for the first time in a month but was bound to a very narrow trading range.

Interest rates continued their southerly path for the week, but the 10-year yield bounced 1 basis point today to close at 2.06%. It sure looks like the 2% level might be taken out fairly quickly, which is quite a reversal from the highs of 2.60% last December when the Trump bump had shifted into high gear.

And then there is the US Dollar index (UUP), which continued its race to the downside matching the price from December 2014. YTD, it has lost an astonishing -11.6%.

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 09/07/2017

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ETF Data updated through Thursday, September 7, 2017

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 +2.70% after having generated a new Domestic Buy signal effective 4/4/2016 as posted.

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Financials Tumble; Major Indexes End Mixed; Dollar Plunges

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

A host of events joined forces to keep equities in a state of uncertainty. It started with an ugly jobs data report showing that jobless claims spiked the most in 12 years, in part due to hurricane Harvey’s economic effects many of which are still unknown. Not helping matters was the announcement that Q2 saw labor costs decline -0.2% YoY, meaning they have been unchanged since 2015 and income gains are simply an illusion.

Financials (XLF) got hit hard today and lost -1.73% with the Regional Banking ETF (KBWR) dropping -2.62%. On the equity side, we saw the International SmallCaps (SCHC) take top billing with +1.08% followed by the Internationals (SCHF) with +0.80%. Ending the day in the red were domestic SmallCaps (SCHA) with a modest -0.28% loss.

With all of the official rhetoric spewed in MSM as to how great the economy is doing, I have to ask: If that is so, why are interest rates collapsing? They should be rising instead. The 10-year Bond yield slipped again by 5 basis points to end the day at 2.05%; which is the lowest level of the year. It looks as though the 2% level may be taken out in the near future to bring us back to where we were at election time. In other words, the Trump pump effect on interest rates has been wiped out. Will equities follow?

The US Dollar (UUP) plunged by -1.33% and has not only been making a new low for the year but also reached a point last seen in December 2014. It has clearly broken its 200-day M/A to the downside and is stuck in bear market territory. On the plus side, gold is heading solidly north and has conquered its $1,350 marker for the first time since July 2016.

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Energy Rebound Assists Equities

Ulli Market Commentary Contact

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

The markets were in rally mode, albeit modest, right after the opening bell and never looked back with the S&P 500 gaining +0.31%. Contributing to today’s bullish mood was some de-escalation with N. Korea, as Trump announced that “war was not first priority,” before agreeing to a 3-month debt-ceiling-can-kicking extension deal ending on December 15.

With more hurricanes on the horizon, energy recovered with crude oil gaining +0.99% and XLE scoring a solid +1.63%. Equity ETFs behaved nicely and closed higher with the leaders being the International arena (SCHF) with +0.62% and International SmallCaps (SCHC) with +0.57%. The losers of the day turned out to be Aerospace & Defense (ITA) with -0.73%, which was obviously due to reduced verbal saber rattling, joined by Gold with -0.42%.

Interest rates reversed from yesterday with the 20-year bond giving back -0.61%. The US Dollar (UUP) dipped lower but managed to rebound to almost wipe out all losses by closing down only a meager -0.08%.

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