One Man’s Opinion: Warning: Risk Parity Funds Will Trigger Another 1987-Type Crash

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By Graham Summers

If you’ve been reading us for some time, you’ve probably wondered why the market keeps rallying no matter what.

Time and again, stocks start to breakdown and then suddenly BOOM they erupt higher. CNBC and other financial media outlets then trot out various narratives to explain the action.

“Stocks went up because the data was strong and the economy is improving!”

“Stocks went up because the data was weak and the Fed will have to intervene!”

These narratives, while amusing, are complete fiction.

Stocks are rallying due to abject intervention.

That intervention is occurring when the Fed has one of its proxies (one of the TBTF banks) engage in obvious and clear manipulation.

Now, market manipulation is a normal facet of the world ever since the 1987 Crash forced Reagan to create the Plunge Protection Team.

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ETFs On The Cutline – Updated Through 05/12/2017

Ulli ETFs on the Cutline Contact

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 243 (last week 237) 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 May 12, 2017

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ETF Tracker StatSheet

https://theetfbully.com/2017/05/weekly-statsheet-etf-tracker-newsletter-updated-05112017/

ECONOMIC DATA POINTS CONTINUE TO WEAKEN

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

The low volatility environment continued as the VIX extended its steak of closing below 11 for 15 consecutive days thereby smashing the previous record. As a result, the major indexes moved in a narrow range, mostly below the unchanged line, appearing to bounce off a glass ceiling all week long.

Equities, with the exception of the Nasdaq, ended in the red for the week with the S&P 500 losing 9 points or -0.33%, a move that is hardly worth mentioning. The retail massacre continued as retail sales missed across the board summarized as follows:

  1. Retail Sales up 0.4%, missing expectations of +0.6%, up from an upward revised 0.1%
  2. Retail sales up 4.5% Y/Y, down from 5.2% in April
  3. Retail sales less autos rose 0.3% in April, est. 0.5%, unchanged from last month’s revised 0.3%
  4. Retail sales ex-auto dealers, building materials and gasoline stations rose 0.2% in April
  5. Retail sales ‘control group’ rose 0.2% m/m in April

Source: ZH

Financials were the loser over the last 5 trading days, but tech performed well with the FAANGs (Facebook, Amazon, Apple, Netflix, Google) taking top billing and accounting for most of the gains. Translated, it means that these 5 stocks gained in market cap while the remaining stocks in the S&P 500 ended in the red. Ouch!

US Macro data has now collapsed for the 8th straight week and has decoupled from reality in similar fashion as it did in 2015. Take a look at these charts and see how that ended up:

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 05/11/2017

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ETF Data updated through Thursday, May 11, 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 +3.30% after having generated a new Domestic Buy signal effective 4/4/2016 as posted.

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Equities Skid But Dip Buyers Save The Day; Is China The Canary In The Coalmine?

Ulli Market Commentary Contact

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

Right out of the gate, the major indexes skidded with the S&P 500 dropping -0.75% before the dip buying crowd (or was it the Fed?) stepped in to save the day. While we still closed below the unchanged line, the early losses were reduced. Nevertheless, after the almost comatose state of the markets of the past 2 weeks, the VIX finally showed some signs of life but was subdued by the end of the session.

Weaker than expected earnings and a slumping retail sector along with worries about possible delays in Trump’s pro-business agenda kept buying appetite in check. The retail bloodbath continued with Macy’s stock crashing after store sales tumbled worse than the already low consensus estimate.

US producer prices spiked the most in 5 years and have now, for third month in a row, risen faster than the Fed’s mandate. Interestingly, they are well above the highest analysts’ estimates despite dis-inflationary pressures from China being seen in industrial metals.

In regards to China, when looking at the global picture of YTD equity performance, one stands out, unfortunately as a bad example. Take a look at this revealing chart:

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Still Riding The Range

Ulli Market Commentary Contact

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

While the Nasdaq managed to ease higher by just enough of a margin to register a new record close for the 4th straight day, the Dow slipped a tad but the S&P managed to bounce against its 2,400 glass ceiling without breaking it.

The Dow suffered a bit from a stock slide in Boeing following headlines that the 737 Max flight will be temporarily suspended due to engine issues. Also not helping the Dow was a news report about Apple experiencing production delays.

Of course, the headlines du jour were all about Trump’s dismissal of FBI head Comey, which surprisingly did not appear to have any market impact following the meme of the past couple of years that “any news is good news.” The VIX remained subdued and has now closed for 13 consecutive days below 11 thereby enabling the major indexes to continue hovering in nosebleed territory.

Interest rates rose a tad with the 20-year Treasury Bond ETF (TLT) losing -0.12%; the US dollar went the opposite way and added +0.12% to now remain firmly above its 200-day M/A after recently having dropped below it.

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