Last week we pointed out the seeming sustainability of the S&P 500 trading above its 50-day moving average line, and before the end of Friday’s session, we had already seen the 200-day moving average of 1274.25 eclipsed.
The SPX closed Friday at 1285.08, and volumes did begin to return to the marketplace toward the middle of last week, both encouraging signs for those who are looking for a continuation of the recent equity strength, especially given the move through resistance areas in between 1273-1280 which did not seem to stand in the bulls’ way one bit.
Coinciding with this equity rally and “risk-on” atmosphere, we had also pointed to put buying in VIX options in recent weeks, and sure enough, as equities have rallied, the VIX has plunged precipitously. Friday’s close of 24.53 in the VIX was the lowest close since early August, and just to put this in perspective, the VIX had traded above 40 on several occasions since the sweeping equity downdraft that began in early August.
This past week we saw a continuation of VIX put buying, specifically the 19 strikes were in play, as market participants seem to be expressing the sentiment that there is some sustainability in this equity rally which will drive the “fear index,” as the VIX is commonly known, even lower going into year’s end.
On the flipside of this scenario, institutional portfolio managers that wisely added to positions or simply “stayed long” during the challenges of early October can use the current VIX environment as an opportunity to pick up relatively cheap portfolio protection in terms of puts just in case this equity rally does peter out. Too often we see managers hedging on the way down, when the markets have already sold off substantially, and implied volatility levels have already jumped, which reflect in the prices of the options, and conversely we do not see aggressive hedging when the markets are on the way up and portfolio hedges via puts are relatively inexpensive. It simply is a result of the old “fear and greed” phenomenon that exists in the markets that most are very familiar with.
In terms of exchange traded fund flows during the trading week it became very clear to us that customers were aggressively moving from “cash” positions and back into broad based equity index products including iShares Russell 2000 (NYSEArca: IWM), SPDR S&P 500 (NYSEArca: SPY) and PowerShares QQQ (NasdaqGM: QQQ).
IWM alone took in well over $3 billion during the week while investors plowed over $1 billion into SPY and nearly $1 billion into QQQ. This type of activity has us in the frame of mind that institutional managers simply “do not want to miss this rally” and thus want exposure to the major index benchmarks.
Another equity based ETF caught our attention earlier during the week as well, and that is Rydex S&P 500 Equal Weight (NYSEArca: RSP). [ETF Chart of the Day]
RSP took in over $300 million on heavy creation activity, and the fund traded huge multiples of its average daily trading volume. We believe that a portfolio manager rolled an existing SPY position into RSP, possibly for tax reasons going into year’s end. China, which we have pointed out in the past as a major laggard compared to the U.S. domestic equity indices year to date, is finally starting to gather some momentum and the trading in iShares FTSE China 25 Index Fund (NYSEArca: FXI) reflects this. The fund saw net creations on the week as well as consistent upside call buying which tells us that managers may be chasing higher beta names in this rally and expecting the performance gap between China and the U.S. and other developed countries to narrow in coming months.
On the fixed income side, SPDR Barclays Capital 1-3 Month T-Bill (NYSEArca: BIL) and iShares Barclays Short Treasury Bond (NYSEArca: SHV) on the other hand saw mass redemptions (collectively over $1.5 billion), as investors who have been utilizing these funds to park their assets during the August through early October uneasiness likely shifted from cash and back into equities this week.
Earlier this week, after weeks of quiet activity in gold, we also noted a significant rally in the commodity (along with other precious metals including Silver, Platinum, and Palladium), and SPDR Gold Shares (NYSEArca: GLD) as well as iShares Gold Trust (NYSEArca: IAU) both broke out of bases and rallied through their 50 day moving average lines. Volumes in either product were not spectacular, but nonetheless the commodity again seems in play, and it is worth pointing out that the gold rally seemed to go hand in hand with the steep fall of the PowerShares US Dollar Bullish (NYSEArca: UUP) and the rally in CurrencyShares Euro Trust (NYSEArca: FXE) following the European debt deal. Another commodity was in play via ETFs this week as well, as we saw U.S. Oil Fund (NYSEArca: USO) experience outflows as oil took another leg higher in its recent rally from its early October (and multi-year) lows.
With trading volumes beginning to return to the markets (we commented in recent weeks that the equity rally looked technically sound but the lack of volume was disturbing), we will be monitoring “old resistance” levels as potentially “new support”, which would be in the SPX 1273-1280 range and noting that the 200 day moving average is in the 1274 range, it will be important to see how the equity market reacts on any potential weakness down to these areas in coming weeks.
For more information on Street One ETF research and ETF trade execution/liquidity services, contact pweisbruch@streetonefinancial.com.