ETF Trends: Equity Bulls Continue Their Charge for No Fundamental Reason

Thursday, which followed the release of President Obama’s outline proposal for healthcare reform, marked 5 straight days of positive performance for U.S. equties. Bullish news events easily outweighed the negative and gave market participants plenty of guidance for the market direction. Volume was considerably higher than the average volume for exchange traded funds representing the Dow Jones Industrials, S&P 500, Nasdaq 100, and Russell 2000 indexes.

Bullish Events:

1) Weekly Jobless Claims came in better than expected at -550k vs. consensus estimates of -565k and previous week of -576k. Continuing Claims dropped -159k to 6.088mm. (One caveat to note is that the expiration of unemployment benefits may be a contributing factor to the upbeat continuing claims numbers.)

2) Auction for 30 year treasuries was received with very strong demand. The bid-to-cover ratio on $12bn was 2.92 as bonds were priced to yield 4.238%.

3) The IEA projects increased global demand for oil based upon global economic recovery. For now, OPEC has decided to keep its production targets unchanged. (In such a scenario, either it wins or it wins.) Energy stocks responded positively to the revised energy demand forecast.

4) Treasury Secretary Geithner testified before Congress that policymakers plan to withdraw some support from the financial markets and do not foresee the need for additional bailout funds. He also stated that their strategy is to repair and rebuild the economic foundations for future growth. (Bullshit or brilliance? Readers can decide for themselves.)

5) JP Morgan’s research analyst issued positive comments on the airline industry, with specific reference to US Airways (LCC).

Bearish Events:

1) July Trade Deficit results delivered a negative surprise of -32.0bn vs. consensus estimates of -$28.0bn and previous month of -$27bn. Normally, oil is the culprit for U.S. trade deficits but this time non-oil imports were a factor. Cash for clunkers led to a surge in auto imports. Consumer goods and capital equipment also showed increases.

2) Monsanto (MON) issued negative earnings guidance.

ETF Highlights on Breakouts & Key Reversals:

1) Jamie Baker, a JP Morgan analyst, issued positive comments on the airline industry and its ability to make it through the winter without bankruptcies, citing adequate cash levels and growing evidence of global economic improvement. FAA (Claymore’s Airline ETF) was up +6.11%. and hit a new 52 week high @ $26.06.

2) President Obama’s healthcare speech and reform efforts have had little impact on the medical devices industry as many of its implantation procedures fall under the umbrellas of Medicare and Medicaid. [[IHI]] (IShares Medical Devices ETF) was up +0.90% and hit a new 100 day high at $50.55. YTD, it has delivered a 26.58% return.

3) For a play on broadband infrastructure, investors might consider networking stocks. IGN (IShares Networking Index ETF) was up strongly Thursday at +2.12% and broke out to a new 100 day high of $26.51. YTD, it has delivered a 51.75% return.

4) Treasury bonds increased on strong demand for 30 year maturities at today’s auction. Supportive for bonds and bearish for the dollar were comments issued by Mike Woolfolk at BONY/Mellon:

"While there are undeniable signs of recovery at hand, and growing consensus of this among US officials, there is little chance of higher rates until unemployment begins to fall. Private demand is [simply] too weak to support a sustainable economic recovery without continued fiscal and monetary stimulus. That said, the USD is unlikely to mount any significant recovery of its own until the Fed begins normalizing interest rates, which will have to wait until next year. Short of another wave of crisis conditions prompting a rush back into safe-haven USDs, the greenback is set to remain weak."

TLT, an ETF proxy for treasury bonds with maturities of 20 years plus, was up +1.84% and re-established support by overtaking its 20 day moving average (at $95.50). TLT also broke out to a new 5 day high of $96.71.

5) Sugar futures increased 4% on speculation that India, the world’s largest consumer, will increase imports to restock inventories. Indonesia is scheduled to report 180k tons before the end of October while Mexico has already increased its sugar import quotas due to a decrease in domestic production. The closely correlated SGG (IPath DJ-AIG Sugar ETF) was up +3.82%. SGG has corrected -16% from its August high to its September low and has found support at its 34 day EMA.

6) Steel stocks displayed remarkable relative strength Thursday as represented by the SLX (Market Vectors Steel ETF) which broke out to a new 100 day high of $51.03. The SLX was up +2.64%. On September 05, 2009, Standard & Poors issued a positive industry report for steel stocks over the next 12 months as it sees a cyclical recovery and their return to profitability based upon a 1.2% GDP increase, a smaller decline in non-residential construction (-13.9% in 2010 vs. -18.3% in 2009), and an increase in auto sales (11.2mm units in 2010 vs. 9.9mm units in 2009).

7) Natural Gas futures increased 15%, their best one day performance in 5 years, on speculation that demand for industrial fuels will increase as the U.S. economic recovery strengthens. The UNG (Natural Gas ETF) is an investment vehicle that I do not favor due to its high premium and potential negative impact from CFTC regulations that may limit the amount of futures contracts it can trade. Despite all this, UNG was up a whopping +10.69% in trading.

ETF Trends: Equity bulls continue to charge ahead and the best thing to do is get the #@%! (insert your favorite expletive if so inclined) out of their way for now or at least until they begin to show some signs of fatigue or waning momentum.

Notable 5 day new highs were amongst the following: U.S. Equities (DIA, XLP, XLE, XLF, XLV, XLB, OIH, PPH, RKH); International Equities (ILF, FXI, EWA, EWH, EWJ, EWY, EWT); Bonds (TIP, HYG, JNK, AGG); and Real Estate (ITB, XHB).

Closing Thoughts:

Statistically, the Hillbent market diary (see below) tells us that stocks are neither extremely overbought or oversold. Fundamentally, the market is ahead of itself and "out of its tree" due to a what I see as a major disconnect between valuations and technicals.

However, it is wise to respect the trends of the market and accept that sometimes the seeds of instability may take years to bloom and bear fruit. One need only look no further back than former Fed Chairman Alan Greenspan’s liquidity spigot during the Bush administration for such an example.

It is always good to be aware of both the fundamental and technical conditions that are driving the market and more important is being able to discern which one is in the driver’s seat. These days, we clearly have a case of the technicals driving the market. For those on board: enjoy the ride, but keep your seatbelts firmly fastened!

Signing off at Hillbent for The Market Direction…

(For a detailed analysis of today’s positive & negative earnings surprises, please refer to Hillbent’s earnings summary reports.)

Key Pivot Areas for Support & Resistance Levels (on 09-11-2009)

Ticker	S3	S2	S1	Pivot	R1	R2	R3
DIA	93.46	94.73	95.53	96.00	96.80	97.27	98.54
SPY	101.01	102.65	103.72	104.29	105.36	105.93	107.57
QQQQ	40.28	40.81	41.14	41.34	41.67	41.87	42.40
IWM	56.34	57.70	58.55	59.06	59.91	60.42	61.78
VXX	47.85	50.36	51.23	52.87	53.74	55.38	57.89

ETF Trend Monitor (09-10-2009)

U.S. Equity ETFs
Equity Indexes	Short-term	Intermediate	Primary
DIA (DJ Industrials)	up	up	up
SPY (S&P 500)	up	up	up
QQQQ (Nasdaq 100)	up	up	up
IWM (Russell 2000)	up	up	up
VXX (S&P 500 VIX Futures)	down	down	down
Major Sectors	Short-term	Intermediate	Primary
XLY (Consumer Discrtn)	up	up	up
XLP (Consumer Staples)	up	up	up
XLE (Energy)	up	up	up
XLF (Financials)	up	up	up
XLV (Health Care)	up	up	up
XLI (Industrials)	up	up	up
XLB (Materials)	up	up	up
XLK (Technology)	up	up	up
IYZ (Telecom)	up	up	lateral
XLU (Utilities)	up	up	down
Key Industries	Short-term	Intermediate	Primary
ITA (Aerospace & Defense)	up	up	up
BBH (Biotech)	lateral	up	up
OIH (Oil Services)	up	up	up
PPH (Pharmaceuticals)	up	up	up
RKH (Regional Banks)	up	up	up
RTH (Retail)	up	up	up
SMH (Semiconductors)	up	up	up
SWH (Software)	up	up	up
SEA (Global Shipping)	up	up	lateral
IYT (Transportation)	up	up	up
International Equity ETFs
Americas	Short-term	Intermediate	Primary
ISI (S&P 1500)	up	up	up
EWC (MSCI Canada)	up	up	up
EWW (MSCI Mexico)	up	up	up
ILF (Latin America 40)	up	up	up
EWZ( MSCI Brazil)	up	up	up
Europe	Short-term	Intermediate	Primary
EWU (MSCI United Kingdom)	up	up	up
EWG (MSCI Germany)	up	up	up
EWQ (MSCI France)	up	up	up
RSX (Mkt Vectors Russia)	up	up	up
VGK (Vanguard Europe)	up	up	up
IEV (S&P Europe 350)	up	up	up
Asian-Pacific	Short-term	Intermediate	Primary
EWA (MSCI Australia)	up	up	up
FXI (FTSE China)	up	up	up
EWH (MSCI Hong Kong)	up	up	up
IFN (India Fund)	up	up	up
EWJ (MSCI Japan)	up	up	up
EWS (MSCI Singapore)	up	up	up
EWY (MSCI South Korea)	up	up	up
EWT (MSCI Taiwan)	up	up	up
VNM (Vietnam)	up	n/a	n/a
Emerging Markets	Short-term	Intermediate	Primary
EEM (MSCI Emerging Mkts)	up	up	up
GMF (Emerging Asia Pacific)	up	up	up
GUR (Emerging Europe)	up	up	up
GML (Emerging Latin America)	up	up	up
GAF (Middle East & Africa)	up	up	up
EWX (Emerging Small Caps)	up	up	up
Alternative Assets
Commodities	Short-term	Intermediate	Primary
GLD (Gold)	up	up	up
SLV (Silver)	up	up	up
DBB (Base Metals)	lateral	up	up
JJC (Copper)	up	up	up
USO (Oil)	up	up	lateral
UNG (Natural Gas)	up	down	down
UGA (Gasoline)	down	up	up
DBC (Commodities)	lateral	down	lateral
DBA (Agriculture)	down	down	down
Forex	Short-term	Intermediate	Primary
UUP (U.S. Dollar)	down	down	down
FXE (Euro)	up	up	up
FXY (Japanese Yen)	up	up	up
FXF (Swiss Franc)	up	up	up
FXB (British Pound)	up	up	up
FXC (Canadian Dollar)	up	up	up
FXA (Australian Dollar)	up	up	up
FXM (Mexican Peso)	down	down	lateral
BZF (Brazilian Real)	up	up	up
CYB (Chinese Yuan)	lateral	lateral	lateral
ICN (Indian Rupee)	lateral	lateral	lateral
XRU (Russian Ruble)	lateral	lateral	n/a
CEW (Emerging Currency)	lateral	lateral	n/a
Bonds	Short-term	Intermediate	Primary
SHY (1-3 Yr Tsy)	lateral	lateral	lateral
IEF (7-10 Yr Tsy)	up	up	lateral
TLT (20 Yr+ Tsy)	up	up	down
TIP (Tsy Inflation Protect)	lateral	up	up
AGG (Investment Grade)	up	up	up
JNK (Hi Yld Bonds)	up	up	up
HYG (Hi Yld Corp)	up	up	up
WIP (Int’l Inflation Protect)	up	up	up
EMB (Emerging Markets Bonds)	up	up	up
MUB (Nat’l Muni Bond)	up	up	up
Real Estate	Short-term	Intermediate	Primary
IYR (DJ US Real Estate)	up	up	up
ICF (Cohen & Steers)	up	up	up
XHB (Homebuilders)	up	up	up
ITB (Home Construction)	up	up	up
FIO (Industrial Office)	up	up	up
REM (Mortgage Reits)	up	up	up
REZ (Residential Index)	up	up	up
RTL (Retail Index)	up	up	up

Market Momentum and Market Diary (09-10-2009)

Market Momentum	20-Day MA	50-Day MA	200-Day MA
Today	78.83%	84.31%	90.76%
Yesterday	73.45%	82.35%	90.14%
Last Week	34.20%	70.67%	87.34%
Last Month	75.66%	84.56%	89.38%
Hillbent	Stocks		Industries
Market Diary	(Russell 3000)		(209)
Oversold (bullish)	21.31%		1.91%
Overbought (bearish)	21.28%		22.97%
5 Day New Highs	157		60
5 Day New Lows	12		0
52 Week New Highs	225		33
52 Week New Lows	7		0
Price Up & Volume Up	34.69%		34.45%
Price Up & Volume Down	38.89%		53.59%
Price Down & Volume Up	10.82%		5.74%
Price Down & Volume Down	13.24%		6.22%

Disclosures: Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

Comments

[AndrewBaker:]

Surely it should be UT for UTopia instead of US! Maybe the greenhouse gas we should be most wary of is that from burning pot (as opposed to POT which is a stock that should be doing well, yet ins't)

Ride the bull, why not? But don't expect to stay on for very long!

Sep 11 11:08 AM

[Mad Hedge F...:]

uufn Since I have had such a hot hand in natural gas, many have asked me to comment on yesterday’s surprise announcement that the ETF, UNG, finally got permission to issue new shares. The easy answer here is that UNG will crater. There is no reason for the fund to trade at a premium whatsoever, which at one point traded as high as 20%, an overvaluation you normally only see in closed end funds at bear market bottoms. These ETF’s are simply pass through vehicles which make it easier for investors to own NG in stock form when they are legally unable, or too lazy to open a futures trading account. They should never trade more than 1% out of line with the underlying to account for the admin and execution costs of running such an instrument. The people who made the killing here were the handful of hedge funds that were able to borrow UNG shares, sell them short, and go long the futures, locking in a guaranteed 20% spread. They will cash in their profit next week. Something similar is still going on where smart industry players have locked up salt caverns to store gas, buy it cheaply on the spot market, and sell it forward. This is possible because yesterday you could buy October at $3.25/MCF and sell it for April delivery at $5.32, giving you an annualized return of 127%. Leverage that, and you are talking about some serious money. If you were wondering where the money was coming from to buy those G5’s, this is it. The fundamentals for the industry are still terrible, and there is a risk that the market could completely grind to a halt when the country runs out of storage, so the volatility will remain huge. This week’s move explosive 44% move from $2.40 to $3.44 was nothing more than pure short covering. I expect a quick double in NG once the storage issue is resolved, and the cheapest, cleanest, and most liquid way to participate is though the futures. If you need help in how to do this, e-mail me at madhedgefundtrader@yah...

Sep 12 02:11 PM

[BullnBear:]

I think the bulls even know that they are on borrowed time in many instances.

I don’t think you can ever put me in just one camp but I’ve been on the bear side for quite a while now but playing bull swings where I can catch them.

If you caught China’s response to the tire tariff that was imposed by the U.S. Friday night then you just might be seeing some of the first signs of potential “slippage” starting to appear for the bulls, just think T-bill auction and China and you get the picture.

Sep 12 07:23 PM

[rick12345:]

And you really believe the Government is about to risk an economic recovery for a bunch of slack-jawed hillbilly's .Think of $800 billion worth of US treasuries going onto the market with no buyers, and the loss of its biggest customer.

Sep 14 06:36 AM