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.
Similarly, another Emerging Markets based fund, EWZ (iShares MSCI Brazil), lost more than $300 million as well, and Brazil is clearly a prominent weighting in aforementioned broad based emerging markets funds including EEM and VWO. In the fixed income space, iShares High Yield Corporate Bond (NYSEArca: HYG) and SPDR High Yield Bond (NYSEArca: JNK) also collectively saw about $400 million abandon ship which is consistent with the recent large print (and subsequent $800 million outflows) in JNK that we pointed out last week in this recap amid a sudden flight to U.S. Treasuries where it feels that institutions are eschewing “riskier” segments of the fixed income markets.
What were investors “buying” last week, if anything? IVV (iShares S&P 500) which is fund sponsor’s iShares’ version of the S&P 500 Index and a direct competitor to the popular SPY (SPDR S&P 500), reeled in more than $400 while related fund VOO (Vanguard S&P 500) also ranked high among ETFs with net creation activity, taking in more than $200 million. It seems feasible that amid the recent outflows in SPY, portfolio managers may be re-allocating to IVV and/or VOO for specific portfolio or tax purposes (or to capitalize on potentially lower expense ratios).
Elsewhere, funds that typically come to mind when there is a “risk off” appetite on the street were active last week, including BND (Vanguard Total Bond Market), LQD (iShares Investment Grade Corporate Bond), XLP (SPDR Consumer Staples), XLV (SPDR Healthcare), and SHY (iShares 1-3 Year Treasury Bond). Collectively, these ETFs accumulated more than $1 billion in assets throughout the week. Even precious metals caught a bid late last week, specifically with GLD (SPDR Gold) and IAU (iShares Gold) as well as SLV (iShares Silver) bouncing from a recent prolonged sell-off, and rumors that large global macro funds including John Paulson for example, were losing their shirts in such investments this year.
In volatility ETFs, the VIX has steadily marched upward and has now spent 12 consecutive trading days above its 50 day moving average, an area that provided technical resistance for nearly 7 months previously. Now, the VIX faces some overhead resistance at its 200 day moving average ($25.77) which is within shouting distance since the index closed at $25.10 last Friday. What has been noticeably absent during the recent equity market fallout is inflows in Volatility driven ETF/ETNs. In fact, the most prominent volatility based ETN, VXX, last week actually net lost assets via redemption activity, to the tune of about $200 million. Also, VIX options activity has been quiet for the most part, and we have not seen evidence of large directional positions building, which we did in fact see last year during the “calm before the storm” prior to last summer’s steep correction (large, out of the money, institutional call buying in VIX in the April through July timeframe of last year).”
Taking a step back after digesting the headlines, and the actual market activity witnessed throughout last week, it leaves us with a few simple take aways: The Euro currency has been falling like a knife amid continued unrest specifically regarding Greece, and taking equity markets, worldwide, with it (been there). Couple this with large trading losses disclosed by one of the nation’s premier banks (JPM) (been there too, only it was MF Global last time), and rumors about former hot-shot hedge fund managers whom can’t seem to get anything right these days (Paulson, Tudor Jones, or whomever is next in line) and you have a sloppy, unstable picture to say the least. Come to think about it, it looks a lot like the tail end of the summer of 2011, only we are still in the month of May.
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Full disclosure: Tom Lydon’s clients own GLD and SLV.