Trading volumes were light last week as would normally be expected during a holiday week, and we may see much of the same this week headed into the new year, with the exception of some potential “window dressing” by portfolio managers.
Following a strong showing last Tuesday where the S&P 500 vaulted above its 50 day moving average, it finished the week with solid momentum and closed above its 200 day moving average as well (currently 1259.19), and we have repeatedly seen any rally in equities rebuffed at this level on at least 4 occasions since October.
From a technical perspective, to see the SPX maintain its posture above its 200 day moving average while eventually challenging the 1277, 1292 (previous intraday highs reached in October and November) and ultimately 1300 levels, and on stronger trading volumes, would be encouraging signs for potential sustainability of any rally.
Meanwhile, we pointed out the sharp fall in the VIX in our last recap and the plunge continued last week, with the VIX closing with a 20 handle and well below its 200 day moving average. The VIX now is trading at levels prior to the sweeping early August equity sell-off that rocked the markets several months back. It may be tempting for investors to gravitate to VIX related ETPs given the recent volatility in the VIX itself, but with this said, it becomes more and more important for the investor to monitor the structure of the VIX itself and be cognizant of when it is trading in contango or backwardation, and how these implications may affect returns if using “long” VIX products such as iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX) or VelocityShares Daily 2X VIX Short Term ETN (NYSEArca: TVIX) for example, or “short” VIX products such as XIV. On that note, iPath S&P 500 Mid Term Futures ETN (NYSEArca: VXZ) saw about 40% of existing assets leave the fund last week while VXX lost about 5% of its assets under management via redemptions in the midst of the volatility seemingly being vacuumed out of the equity market in short order.
Flows were clearly behind equity based broad based products last week judging by the creation/redemption activity that we monitor. The iShares Russell 2000 (NYSEArca: IWM) took in over $2 billion in new assets, followed by PowerShares QQQ (NasdaqGM: QQQ) and SPDR S&P 500 (NYSEArca: SPY) with about $1.8 billion and $1.2 billion apiece. GLD, which saw heavy redemptions two weeks ago as the metal fell steeply over the course of just a few days, continued to see assets flow out of the fund last week, losing about $1.4 billion in redemptions.
In what may be related activity, PowerShares DB US Dollar Index Bullish (NYSEArca: UUP) took in nearly $400 million in new assets, and despite having quite a price range in the past 2 months as the European situation continues to get sorted out, options flows have consistently been leaning “long U.S. dollar” as well as we continue to see call buyers in UUP, call buyers in ProShares UltraShort Euro (NYSEArca: EUO), and put buyers in CurrencyShares Euro Trust (NYSEArca: FXE).
We watch the euro especially closely around the $1.30 level as it has shown some support there and those trading UUP are obviously mindful of what the euro does on a day to day basis as well. In one of our daily recaps last week we spoke about a number of the HOLDRS products seeing asset outflows which was not particularly surprising given the expiration of the tender exchange offer from Van Eck to existing owners of the Merrill Lynch HOLDRs products. One “swap” seemed evident to us, where we saw about $700 million leave Oil Services HOLDRS (AMEX: OIH) and $800 million enter SPDR S&P Oil and Gas Exploration and Production (NYSEArca: XOP) via creations. This activity amounts to more than 20% of the outstanding assets in the fund, so it is certainly noteworthy institutional buying. In other unusual creation activity, in generally lightly traded PPA, we saw two giant volume days last week, where the fund traded over 5 million shares on Wednesday and well over 2 million shares last Thursday (versus average daily volume of about 200,000 shares and over $130 million in new assets entered the fund).
With the S&P 500 going into the final week of 2011 with a marginal gain of about 0.5%, and assets such as gold still being up handily (+12.67% year to date) despite the recent drubbing, we would expect to see some level of year end related “window dressing” activity as well as another round of tax related ETF “swaps” which we have discussed in recaps from previous weeks. This activity should contribute to a lift in volumes over last week’s levels, and likely will provide a better technical foundation for any short term direction the markets may take in early 2012.
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