Equities Pump And US Dollar Dumps

Ulli Market Commentary Contact

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

The equity bounce continued for the fifth day in a row, as the major indexes started the session in the positive, then dropped below the unchanged line and subsequently surged in a V-shape type recovery without looking back to close at the highs for the day. I took the opportunity during the momentary weakness to add to our positions as mentioned yesterday.

Apparently, Wednesday’s “hot” CPI report still did not bother traders who simply shrugged it off and proceeded driving the markets higher by continuing with their short squeeze, which is now on record as the biggest since the election. The VIX diverged today closing modestly higher while the S&P remained in rally mode.

Interest rates pulled back with the 10-year yield dropping 1 basis point to 2.90%. The US Dollar (UUP) showed some strength early on, then collapsed (down for the 5th day in a row) to its lowest close since December 2014.

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Market Madness: CPI Surges, Dollar Collapses, Bond Yields Up But Stocks Rally

Ulli Market Commentary Contact

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

Sometimes you just have to laugh when you see the type of chaos in the markets that we saw today. The widely anticipated Consumer Price Index (CPI) reading came in much “hotter” than expected as it surged 0.5% in January. Consequently, bond yields spiked with the 10-year adding 8 basis points to close at 2.91%, which is its highest close since January 2014.

The US Dollar (UUP), which should have rallied given the yield surge, collapsed -0.77% while stocks rallied after an early morning dip pushing the major indexes solidly in the green. This outcome left many analysts scratching their heads as higher stocks, higher yields and a lower US dollar simply does not add up.

ZH summarized it best in what we learned during this session based on the reaction of various asset classes:

  1. Yields: many, many rate hikes
  2. Dollar: no rate hikes
  3. Stocks: hmmm, maybe some rate hikes
  4. Gold: we blew up the fed. No rate hikes.

Apparently, the new theme is that stocks love higher bond yields. Go figure…

The VIX hit and intra-day of 25 but closed below 20, while the Dow had a swing from the lows to the highs of some 600 points and today’s short-squeeze was the biggest in the past 12 months. These are all indications that equities can turn in either direction on a dime.

Nevertheless, the major trend remains bullish, and I will increase our ETF exposure slowly but surely while keeping my eyes firmly feasted on our exit strategy.

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Fed Head Saves The Day

Ulli Market Commentary Contact

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

The major indexes slipped right after the opening bell and remained below their respective unchanged lines for most of the day but ended up crawling into the green to close with modest gains. Saving the day was new Fed Head Jay Powel after uttering words like financial stability, which was music to the ears of the traders to leave the early bearish mind set.

Nevertheless, activity was subdued ahead of tomorrow’s key inflation reading on January’s CPI. Traders are worried that a “hotter” than expected number could create another sell-off with higher prices causing the Fed to hike rates at a faster pace to control inflationary forces. That would spike volatility and could lead to a repeat of last week’s negative effect   on equities.

Not helping matters was Trump’s proposed $4.4 trillion federal budget, which would just about see the current deficit (2017) double and in the next year and climb some $7 trillion over the next decade, which for sure will have Treasury yields jump as higher interest rates are baked in the cake.

However, today, bond yields pulled back slightly with the 10-year dropping 3 basis points to end at 2.83%. The US Dollar (UUP), which rebounded off its lows last week, returned to its bearish trend by losing -0.55%.

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Bargain Hunting

Ulli Market Commentary Contact

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

Volatility continued today although not much was visible during the regular session. ZH remarked:

Having been up almost 400 points from its Friday cash close, Dow futures plunged back into the red, amid chaotic swings and the lowest market liquidity ever seen. But that did not last as the machines dragged stocks back up – The Dow up over 500 points to a 50% retrace of its Volocaust losses… before running out of steam…

In other words, we are still in the middle of chaotic conditions where anything can happen as witnessed by the “Fear-and-Greed” index whose needle remains stuck at “Extreme Fear.” It will take a little time to evaluate if the VIX is just taking a break to come back with a vengeance or if today’s upside follow through signals an end to the correction.

Markets headed higher supported by declining bond yields and a weaker dollar. The execution of our trailing sell stops last Friday affected about 55% of our ETF holdings, and we are participating in the current rally with the remaining 45%. I will increase those percentages as soon as I see some calmness return to the markets, which also likely means that bond yields will need to stop rising.

That was not the case today as the 10-year rose 3 basis points to 2.86% with inflation worries being on the forefront. In that regard, traders are eagerly awaiting Wednesday’s Consumer Price Index (for January), which is critical, as a higher than expected number will represent further inflationary tendencies, followed by higher interest rates and potentially a bearish effect on equities.

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ETFs On The Cutline – Updated Through 02/09/2018

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 173 (last week 232) 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 February 9, 2018

Ulli ETF Tracker Contact

ETF Tracker StatSheet

https://theetfbully.com/2018/02/weekly-statsheet-etf-tracker-newsletter-updated-02-08-2018/

 RIDING THE ROLLER COASTER—AGAIN

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

The session started out with an early bounce that slowly but surely deteriorated, but some mysterious buyers stepped in late in the day to push the indexes back above their unchanged lines. It must have been bottom fishers, as the S&P 500 had just broken its 200-day M/A to the downside. Still, for the week, the markets posted their largest weekly drop since early 2016. The current chaos was spread widely with equity flows recording their biggest swing ever: Record inflow 2 weeks ago to record outflow from equity funds this week.

As the markets were starting to look dicey mid-day, I took the opportunity to liquidate those holdings (locking in a profit) that were on my list after having broken through their trailing sell stops. In my mind, there are only 3 things that can happen now:

  1. The markets continue to be chaotic and work their way lower by pushing our Trend Tracking Indexes into bear market territory. Should that happen, our sell stop exit strategy got us out in time before things got worse.
  2. The markets are indecisive and volatile and establish a sideways pattern with no clear direction in sight. However, eventually a break out, either up or down, will occur.
  3. The markets are finding a bottom here, and the major indexes resume their upward trend towards their old highs. In this case, the liquidation of our ETFs generated by our sell stop strategy was false and/or premature, and I will have erred on the side of caution. Having seen my share of market disasters over the past 30 years, I’d rather be a day early than a day late.

We will now have to wait and see if our remaining positions will get stopped out and if my 3 scenarios will start to play out next week.

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