We did see some large sector selling in certain spots in the U.S. equity space, and it is possible that managers are locking in gains here and potentially rotating the assets into other segments of the market. XLP, XLU, and XLK all saw net redemption activity last week despite the largely bullish tape throughout the week, with a collective $1.3 billion flowing out of these three funds.
Also on the redemption side of activity, we saw more than 5% of the assets outstanding in UUP flow out of the fund, as the euro currency rallied considerably last week versus currencies such as the U.S. Dollar (eclipsing the $1.32 mark at one point) an sending UUP to its lowest levels since early December of 2011 on very heavy volume last week.
We did not see any out of the ordinary creation or redemption action however in Euro currency related ETPs such as FXE or EUO, and we note that on the futures and options side of things, we still see an institutional willingness to be “short” the euro despite its recent impressive rally, as put buyers continue to surface in pockets in FXE and there is also very heavy short interest in euro currency futures and options (recently the short interest has reached its highest levels since 2007 there according to CFTC data). Back on the equities side, beginning about mid-week and continuing throughout the remainder of the week, we did begin to see a notable amount of put buying across various ETF products in the marketplace, and generally an absence of notable call buying.
Puts in IWM, SPY, as well as sector specific products such as many of the SSGA Select Sector SPDRs was the theme, and it seems that institutional investors whom are “long” equities are willing to lock in gains and purchase what appears like relatively inexpensive downside puts (given the VIX’s recent closing level of $18.53 (and having fallen as low as $16.80 a day prior). It is also entirely feasible that the put activity could be outright bearish speculation from those whom believe equities have run too far, too quickly. Similar activity occurred in TZA late in the week where we saw more than 10% of the current assets outstanding flow into the fund via creation activity (about $110 million in new assets).
Since TZA is a 3 times daily leveraged inverse product that tracks small cap U.S. equities via the Russell 2000, inflows in this product are evidence of aggressive, bearish sentiment by one or more institutional players and could be a portfolio hedger, or outright speculation on a pullback. With more news expected out of Europe this week as leaders are meeting in Brussels in order to finalize a German led “deficit control treaty,” we will likely see additional volatility this week such as the tape suggested going into the end of last week in reversing the recent highs that were briefly registered just a day prior.
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Full disclosure: Tom Lydon’s clients own SPY.