The equity markets backed off from recent highs throughout last week, with the S&P 500 falling through its 50 day moving average (1228.77 currently) and closing below this level on Friday. After spending 10 consecutive sessions above its 50 day and even challenging its 200 day moving average on several occasions earlier in December, the SPX has lost some steam as of late.
Traders have pointed to a decline in the VIX that has occurred over the past week or so, seemingly in lockstep with the weakness in equities, which seems to defy conventional wisdom. The VIX in fact closed below its 200 day moving average the past two trading sessions, something it has not done since July of this year before the sudden and steep August equity meltdown.
With the VIX trading with a $24 handle currently after spending most of the late summer and fall in the $30-$46 range, market sentiment seems to reflect that there are no expectations of much of a move in the near term in equities, and perhaps the SPX continues to trade in a channel between the 1200-1270 range which it cannot seem to break out of.
The relatively depressed value of the VIX may be somewhat misleading however, as institutional options players largely unwound December SPX put protection the past few sessions and began to buy puts further out on the calendar such as March options. This near month put selling going into last Friday’s expiration certainly does contribute to devaluing the VIX to some degree, so we would caution one from making a judgment that based on the VIX itself it shows that there is “no fear” in the current marketplace, which is sometimes the conclusion that is drawn when the VIX declines as it has.
Our market technician David Chojnacki pointed out in a note on Friday that the 1220-1225 area in the SPX is a “pivot point (we closed at 1219.66 on Friday) for directional bias” and to “look for the S&P to find support near term at 1208 and 1200.” Techs continued to demonstrate the inability to breakout convincingly last week, and we have indicated our belief in the sector’s leadership importance for any sustained equity rally in previous recaps. PowerShares QQQ (NasdaqGM: QQQ) for instance is now trading below both its 50 and 200 day moving averages and closed near its lows on Friday after a stronger opening.
From a fund flows standpoint, a number of issues were quite active that may lend some color to what the final weeks in the year may bring. We mentioned QQQ above, and a related ETF, Technology Select Sector SPDR (NYSEArca: XLK), saw nearly $800 million flow into the fund last week. XLK tracks the S&P Technology Index with top holdings including AAPL (which is also the top weighting in QQQ), IBM, MSFT, T, and GOOG.
We also saw about $300 million flow into another sector fund, Consumer Discretionary Select Sector SDPR (NYSEArca: XLY). Value stocks seemed to be in favor as well last week, as we saw good sized call buyers in generally lightly traded iShares Dow Jones Select Dividend (NYSEArca: DVY) options, as well as about $500 million via creations appearing in the ETF. [Chart of the Day: Dividend ETF]
The iShares S&P 500 Value (NYSEArca: IVE) also saw over $400 million in net inflows. On the fixed income front, SPDR Barclays Capital 1-3 Month Treasury Bill (NYSEArca: BIL) saw outflows in the neighborhood of about $700 million, and it is possible that institutional monies that have been parked in this “cash” like ETF are mobilizing into other areas of the market going into year’s end. This amounts to more than 25% of the total assets in this ETF, so we do find this rotation notable.
Elsewhere, in commodities, gold fell steeply last week, along with other precious metals including silver, platinum, and palladium and volumes were much heavier than average in related ETF and ETN products. SPDR Gold Shares (NYSEArca: GLD) and iShares Gold Trust (NYSEArca: IAU) closed below their 200 day moving averages for the first time this year, and not surprisingly, GLD saw nearly $1 billion flow out of the fund this week via redemptions.
Metals were not the only space in commodities to take a hit last week, as crude oil felt the pain over the latter half of last week as well, with U.S. Oil Fund (NYSEArca: USO) for instance falling through both its 200 day and 50 day moving averages in the span of three days and closing at its lowest levels since early November.
On the currency front, CurrencyShares Euro Trust (NYSEArca: FXE) reached new recent lows on Wednesday before recovering somewhat to end the week, and flows suggest that options and ETF institutional players are still positioning for a weaker euro against the U.S. dollar amid overall concerns about Europe’s economic health. As we look into early overseas action to start this week, we see that Fitch Ratings have warned that they may cut the credit ratings of European nations and this has caused moderate sell-offs in most equity markets worldwide, as well as a renewed retreat in the Euro.
With December options expiration “noise” now behind us, we will watch the VIX closely this week for new indications of potential signs of where this equity market may take us through this upcoming holiday week and the close of 2011.
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