Stock exchange traded funds were set for a higher open Tuesday following the holiday weekend with S&P 500 futures testing the key 1,300 level before the opening bell.
Equities marched steadily higher last week, even reversing early weakness last Friday to finish near the high end of their ranges while shrugging off bearish news out of Europe. We saw the SPX close at 1,289.09 on Friday, and it traded as high as 1,296.82 the previous session before giving back some gains.
Our market technician David Chojnacki noted on Friday morning that the SPX has two levels of support near current levels, both at 1,285 and 1,263, and we have now successfully traded above the 200 day moving average for nine consecutive sessions. David also pointed out resistance levels in the SPX both at 1,300 and 1,312, so it is very possible that equities may hover in a rather narrow range in weeks to come.
We’ve been looking for relative strength in the technology sector to help fuel an equity rally. So far in 2012, techs have not disappointed, as the Nasdaq 100 is up 4.20% year to date versus the SPX up 2.79%. There, Apple (NasdaqGS: AAPL) remains the story as the stock continues to challenge new highs despite temporary short term set backs, and the company makes up about 14% of the Nasdaq 100. Microsoft (NasdaqGS: MSFT) follows, with an 8% weighting, and the stock absolutely sprung to life since the beginning of this year, rallying nearly 10% and breaking out of a narrow trading range.
Volumes in the overall marketplace were relatively light however last week, with the exception of Friday where activity picked up to some degree. From a volatility standpoint, we still see a VIX trading in the 20s range, although over the past three sessions the index has moved higher from the lower 20s.
Volatility related ETNs were extremely active last week as we saw VelocityShares Daily 2X VIX Short Term ETN (NYSEArca: TVIX) trade a multiple of its average daily volume both last Thursday and Friday, and iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) and VelocityShares Daily Inverse VIX Short-Term ETN (NYSEArca: XIV) volumes were also healthy.
It is difficult to say exactly what type of speculation and/or hedging is occurring at these levels, as we generally look to VIX options flows as leading indicators of how institutional participants are “playing” the VIX, and these flows have been rather quiet since around Thanksgiving time (when the majority of options flows consisted of VIX put buyers with the VIX trading considerably higher than current levels).
From an asset flows perspective, PowerShares QQQ (NasdaqGM: QQQ) took in over $1.6 billion last week in new assets, ranking number one in the ETF space in net creation activity for the week.
On the flipside, iShares Barclays 1-3 Year Treasury Bond Fund (NYSEArca: SHY) saw about $1 billion leave the fund, which is likely a reflection of institutional players moving out of short term Treasuries and back into equities. Despite the strength last week however in equities, both iShares Russell 2000 (NYSEArca: IWM) and SPDR S&P 500 (NYSEArca: SPY) saw assets vacate the funds via redemption activity, with a total of about $1.5 billion leaving the two funds collectively.
Vanguard Emerging Markets (NYSEArca: VWO) also took in net assets last week, accumulating nearly $700 million, and since this ETF is designed to track the MSCI Emerging Markets Index and has notable exposure to the BRIC economies (Brazil, Russia, India, and China), these flows can be conveyed as a bullish indicator for what many see as a downtrodden asset segment.
In the trailing one year period, the MSCI Emerging Markets Index is down 17.94% versus the S&P 500, which is roughly flat (-0.22%), so with U.S. domestic markets challenging recent highs lately, it seems apparent that those with a greater risk appetite are looking for opportunities to snag bargains in the emerging markets. If you go out five years and examine trailing returns, the MSCI EM Index is up 5.54% versus the SPX down 9.92%, so perhaps these buyers are simply sizing up an opportunistic longer term buying opportunity at this juncture.
Vanguard Emerging Markets
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Full disclosure: Tom Lydon’s clients own SPY.