The S&P 500 closed out a shortened four day trading week with a massive 57 point range from peak to trough, and finished on a low note after very disappointing employment numbers and the broken record effect of a continuance of negative headlines coming out of Europe.
After trading as high as 1334.93 on Tuesday, the situation deteriorated throughout the rest of the week and the SPX closed below its 200 day moving average for the first time in 2012 (Friday close was 1278.04 versus 200 day MA of 1284.53). [Equity ETFs Breach 200-Day Average]
Volume was notably higher in the latter part of last week in equities as well, with SPDR S&P 500 (NYSEArca: SPY) trading more than 253 million shares versus 3 month average daily volume of 159 million shares. The VIX registered more than a 10% gain on Friday and closed above its 200 day moving average for the first time in 2012 as well, at 26.66.
Another indication that fear has certainly crept back into this market is the recent move in longer dated U.S. Treasury Bonds. With nearly a 6% weekly gain in iShares Barclays 20+Year Treasury Bond (NYSEArca: TLT) on enormous trading volume, it is clear that portfolio managers have been shifting assets into fixed income products, despite extremely low yields in the case of longer term Treasuries. [Are Treasury ETFs Risk-Free?]
In fact, we have cited the presence of “Bond Bears” for the past two years periodically, as they resurface from time to time, largely adding to bearish positions in TLT via options or via leveraged inverse fixed income products TBT (ProShares UltraShort 20+ Year Treasury Bond) and TMV (Direxion Daily 20 Plus Year Treasury Bear 3X). Toward the end of last week, and with consideration that short interest in longer term U.S. Treasuries still remains at multi-year highs, it felt that there was indeed a short squeeze effect occurring throughout the government bond markets given the ferocity of TLT’s rally on tremendous trading volume.
In fact, we saw heavy call volume in TLT last Thursday before Friday’s price gap up, and this is in sharp contrast to the typical flow which consists of TLT put buying and TBT call buying. It will be interesting to see in the coming week if there is carry-over in the long term government bond markets in terms of last week’s strength, or will bond bears rear their heads again and take the other side of this most recent and vicious price rally.
Finally, in relation to fixed income, our colleagues at Blackrock iShares pointed out to us last week that two high yield corporate bond ETFs, HYG (iShares High Yield Corporate Bond) and JNK (SPDR Barclays High Yield Corporate Bond) traded such heavy volume on the exchanges last week, that their combined volume accounted for 35% of the total volume in the bond market on at least one occasion last week (typically 10-15% of the volume).
Elsewhere, the Euro currency continued its recent slide versus the U.S. Dollar last week with the exception of a small bounce last Friday, as FXE (CurrencyShares Euro) closed at $123.55 after spending the previous week in the $125-126 range. It seems clear that the Euro weakness (and thus U.S. Dollar strength), has weighed heavily on commodity prices such as Crude Oil which continues to toil at recent lows, and even Gold saw a huge pop last Friday, spiking more than 6% from it’s lows during the week.
Despite the negative looking tape in equities, net creation activity across ETFs still was heavily tilted toward equities. SPY reeled in about $1.5 billion to lead the pack, and XLE (SPDR Energy) took in more than $1 billion in a week of huge flows for the sector ETF, accounting for more than 16% of the assets outstanding in the fund.
With top weightings consisting of XOM (18.85%), CVX (14.77%), and SLB (7.08%), it is possible that institutional participants are using the recent steep drop in crude oil prices combined with broad market (and energy sector) weakness, to look for value in large cap oil related equities. Additionally, a number of Vanguard core and value tilted products saw significant inflows throughout last week, including VB (Vanguard Small Cap), VO (Vanguard Mid Cap), VTV (Vanguard Value), VBK (Vanguard Small Cap Growth), VUG (Vanguard Growth), and VBR (Vanguard Small Cap Value), which reeled in more than $3 billion collectively.
From the outflows side of the equation, we saw Techs and Financials (two higher beta sectors obviously) lose assets as QQQ (PowerShares QQQ) saw about $800 million leave the fund and XLF (SPDR Financials) gave back $130 million. REITs, namely IYR (iShares DJ U.S. Real Esate) and XLI (SPDR Industrials) were also among the net losers last week in terms of asset flows, as these two funds lost nearly $300 million collectively via redemptions.
Going into the first full trading week in the month of June, a few items will be squarely focused on our radar in the early part of the week, namely the U.S. Treasury Bond Market, Gold Prices, the VIX, and the S&P 500 in relation to its 200 day moving average. We seem to be at an important crossroads in terms of the market establishing any consistency in near term direction, and with more institutional market participants expected to be in their offices back from the abbreviated holiday week last week, we should have a true gauge of how the battle between the bulls and bears will play out in coming days.
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