This past week resulted in a handful of small early morning and intra-day rallies in equities that were met with selling, pressing the indexes lower, and lower each day, with a trend that resembled “closing at or near the lows, instead of rallying into the market closes.”
If one went on sabattical at the very end of April and decided to “not look at charts and just count their money that has been made so far in 2012 in the S&P 500,” for the index did appear to be stable and was actually challenging new recent highs north of 1400, they would unfortunately return today from their respite from the markets to witness what resembles a bloodbath.
In 11 of the last 13 trading sessions in the SPX we have finished with a loss, and gradually new lows creating lower lows the following day. At least the bulls can still say “well I’m still up for the year,” as the SPX is still net up 3.38%, but that does feel like such little consolation given the magnitude and speed of this recent sell-off that has taken the SPX down to 1295.22 (Friday’s close). As our market technician David Chojnacki noted in a brief from Friday morning to our trading clients, “The indices made new lows. with prices back to January levels. Near and short term technicals are extremely weak as the correction continues. RSI’s are in the mid-20’s, signifying an over-sold condition.
RSI’s have not been this low since August 2011 when the indices were making a bottom prior to the recent rally.” Note that this was sent out before another weak day in equities on Friday, where the SPX even plunged through what some thought was psychological support at 1300, on the same day as the Facebook IPO of all days. If there is any silver lining at all, the SPX still remains above its 200 day moving average (currently this level is 1278.22) and has not touched here since January of this year, and Mr. Chojnacki also points out we are nearing longer term technical support levels. So a near term “oversold bounce” would not be outside of the realm of possibility for nothing more than technical levels alone in our view.
Market participants that have been paying attention closely though for the past month or two cannot say that the correction has come without warning however. We noted going back at least one month the acceleration of put buying in higher beta segments of the market such as Emerging Markets, and specifically in iShares MSCI Emerging Markets (NYSEArca: EEM) and Vanguard Emerging Markets (NYSEArca: VWO), subsequently followed with heavy redemption activity. Similarly, Technology (specifically QQQ), Small Caps (IWM) and Financials (XLF) all had substantial asset outflows and bearish put activity for the most part, before this recent leg down in the markets, and before the bombshell that JPM and Jamie Dimon dropped on the marketplace in recent days. Similarly, in recent weekly recaps such as this, we pointed to what seemed to be a “rush” to conservative fixed income oriented ETFs, including those that invest in U.S. Treasury Bonds as well as short term, high grade liquid corporate credit. Another significant correlation that we “have to point out” is that not only U.S. equities, but world equities, are now seemingly moving in lockstep once again with the price of the Euro currency.
Earlier this year, we noted what seemed like the dissipation of this relationship (where stocks could actually rallying amid a falling Euro), which we saw as positive for all markets, but the relationship is back intact, and has been vicious on both those long the Euro, and long equities in recent weeks. FXE (CurrencyShares Euro) actually popped on Friday after a steep and continual downdraft throughout May, but it still remains near lows that were established in January of this year.
From a fund flows perspective, SPY for the second straight week led the pack in terms of net redemptions, losing approximately $2 billion during the week. SPDR Financials (NYSEArca: XLF) ranked second with north of $1 billion leaving the fund, and note that the second heaviest constituent weighting in the fund is JPM with an 8.84% weighting. Both VWO and EEM were near the top of the list in terms of redemptions as well (losing more than $900 million collectively), which is consistent with what we have seen for at least two weeks now after an influx in assets in both funds earlier this year in the January through early March timeframe. A related fund, thinly traded AAXJ (iShares MSCI All Country Asia ex Japan) also took a beating last week in terms of flows, with about 10 million shares trading last Wednesday where the fund lost $433 million in assets.