ETF Trends
ETF Trends

We go into another week watching the S&P 500 mindfully to see if the equities markets have any staying power above recent resistance levels, as the index again flirted with its 200 day moving average line (currently 1,263.32).

Overall volumes were slightly below average last week, but it was encouraging for the bulls to see equities bounce back nicely to close the week on Friday after Thursday’s Europe related drubbing. However, stocks sold off again on Monday as recession fears and European debt soured the mood. [Stock ETFs Fall]

Also of note was Friday’s sharp decline in the VIX, which fell from a $30 handle to close at $26.38. The VIX has bounced off its 200 day moving average which it is fast approaching, on two occasions since October as bears and portfolio hedgers have generally used declining levels of volatility in the marketplace to purchase puts and establish hedges with doubt that we will have any sustained equity rally.

On the flows side last week, financials saw bullish flows, with well over $500 million entering XLF via creations, and we also pointed out sizable call buying in the ETF during Thursday’s market sell-off, an indication that market participants were using weakness in the sector to accumulate shares.

Financials outpaced the broad market in the past week, up 1.38% versus the SPX rallying 0.94%. We would wager that the average investor does not realize that Warren Buffet’s BRK.B is the highest weighted name in XLF these days (9.12%), as the stock was not even in the S&P Financials Index say 4 or 5 years ago, as it was added amidst the post 2008 upheaval in the financials industry with many of the stalwart names vanishing from the landscape (think Lehman, Bear Stearns, Washington Mutual, Countrywide, and so on).

Wells Fargo, JP Morgan, Citigroup and Bank of America round out the top 5 weightings in XLF, so there is a clearly a large cap “bank” bias even though the sector ETF holds securities of insurance, capital markets, mortgage finance, and REIT focused companies.

Another sector we continue to watch and have mentioned in previous recaps is Technology, as QQQ delicately remains above both its 200 and 50 day moving averages and the real story there is Apple, which has shrugged off Thanksgiving weakness rather well and appears poised to challenge the $400 level again. AAPL has a 14% weighting in the Nasdaq 100, so its day to day action is obviously impactful for the sector, not to mention the general market to some extent. SPY on the week also took in assets, to the tune of about $5 billion which is an indication of managers snapping up benchmark beta exposure so as not to miss a holiday rally, and can also be partially explained by short covering.

One sector that saw substantial redemptions las week was that of healthcare. XLV traded over 40 million shares last Monday versus average daily volume of about 11 million shares as about $500 million left the fund on the redemption side.

In the fixed income arena, JNK took in about $500 million as well, and this could be a reflection of managers becoming comfortable with high yield names in the fixed income space as a means to achieve better yields than are currently being earned in Treasuries, which many a fund manager has lamented are paying next to nothing at current levels.

Thus, a familiar trade that has been around for a few months is purchasing TBT or TMV in efforts to essentially “short” the Long end of the Treasury Bond curve, as TLT has traditionally been hard to borrow. This trade has not exactly worked out however for any sustained amount of time as any short term weakness in Treasuries (and thus rallies in equities), has petered out and reversed in the past few months.

With TLT falling sharply on Friday (more than 2%) and closing below its 50 day moving average (a level it has literally clung to for several months), this will be something to closely monitor throughout this week for macro level signs of risk appetite among investors and to see if this equity rally indeed has any legs.

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