One Man’s Opinion: A Recession Could Change Everything

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OneMan'sOpinionBy John Mauldin

How on God’s green earth are we supposed to make sense, from an economic and investment portfolio view, of what is happening?

A recession could change everything

It has been quite a while since we have had a recession. When we do have one, it’s going to further limit our choices.

Donald Trump

The economic realities of the world have not shifted much in one week. We still have too much debt, not just in the US but around the world. Budget deficits are out of control, not just in the US but around the world.

The reactionary forces of protectionism are loose, and the results might not be salutary for investors. Markets are stretched to valuations that have historically been dangerous.

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ETFs On The Cutline – Updated Through 11/25/2016

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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 365 High Volume ETFs ETFs, defined as those with an average daily volume of more than $5 million, of which currently 200 (last week 183) are hovering in bullish territory. The yellow line separates those ETFs that are positioned above their trend line 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 November 25, 2016

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ETF Tracker StatSheet

https://theetfbully.com/?p=18121&preview=true

Market Commentary

Major Indexes Inch Higher During Holiday Shortened Week

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

There was no letting up this week as the major indexes kept the rally going with the only fly in the ointment being extremely low volume as many traders took off for the Thanksgiving holiday. The S&P 500 managed to gain +1.4% during the past four trading days.

Investors were keeping an eye on retailers during this Black Friday, but initial reviews saw store traffic as being subdued across the nation, most likely due to early discounted selling over the past few weeks. Another argument could be that consumers are suffering from sticker shock caused by soaring Obama-care premiums reducing disposable cash for the holidays. Dollar sales in the second week of November were 8 percent lower than in the same period last year.

Ten of the eleven major S&P sectors closed higher with the leader being utilities, which sported a gain of +1.43%. The energy sector closed down propelled by a loss of -4.17% in oil prices, which “enjoyed” their headline driven roller coaster ride. Bond prices slipped as yields rose, a phenomenon that, depending on its continued magnitude, will affect the stock market negatively at some point in the future.

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 11/23/2016

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ETF Data updated through Wednesday, November 23, 2016

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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

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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 +1.07% after having generated a new Domestic Buy signal effective 4/4/2016 as posted.

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Rebounding Into Thanksgiving

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wed-pic

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

An early sell-off in the S&P 500 was short lived as Wall Street traders and computer algos stepped in and pushed the index back above its unchanged line eking out another record high as an early holiday present.

The industrial sector was the driver behind this rebound boosted by a jump in orders for durable goods in October. Again, helping matters was the continued belief that Trump’s spending plan for infrastructure projects accompanied by reduced regulations and taxes will shift economic activity into a higher gear. Let’s wait and see what really happens once the man steps into office on January 20th.

For sure, there is a lot of portfolio re-positioning going on as the shift from a slower growth environment into a hopefully faster one continues based on not only a different administration but also a different business environment. Be that as it may, I believe that, as usual, the major indexes have gotten ahead of reality and a pullback during the first 2 weeks of December would not surprise me one bit.

The markets will be closed on Thanksgiving and Friday’s session will be an abbreviated one.

Have a great Thanksgiving!

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Priced To Perfection

Ulli Market Commentary Contact

tue-pic

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

The post-election levitation continued as the major indexes edged higher with the S&P 500 and the Dow taking out new milestone markers for the first time; i.e. the 2,200 and 19,000 levels, although with low volume during this Holiday shortened week.

Again, Wall Street’s focus remains on the Trump promises of less regulations, tax cuts and the mother of all infrastructure spending, which would benefit a  wide variety of industries. Especially tax cuts are in focus as they are assumed to boost earnings per share and increase the odds of a longer lasting economic expansion.

However, at this point it’s nothing but “irrational exuberance,” to use former Fed chief Greenspan’s famous words. So far, this rally is based on nothing but hope and should President-elect Trump fail to execute, or bond yields continue to spike more than expected, there will likely be a price to be paid in form of a sharp correction.

A big focus in the media has been the fact that all major indexes have closed at record highs on the same day. Well, as ZH pointed out, the last time this happened it did not work out so well, as the following chart clearly shows:

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