Equities were tripped up last Tuesday after finishing the previous week with some signs of weakness, but the sell-off only proved temporary as we rallied throughout the remainder of the week and closed Friday in the S&P 500 above the 1370 level, within shouting distance of the 1378.04 intraday high registered at the end of February.
What is likely an encouraging sign for equity bulls is the decoupling we noticed last week in the price of the Euro and the direction of equities. Market observers can look back just at last summer during the dark days of the August sell-off when as the Euro went, stocks went, but last week, this relationship was not intact.
On optimism about a resolution to the Greek debt situation, the Euro fell to one month lows, but equities in world markets continued to rally despite this fact. Recently, after a few months of relative silence in ETF options world in currencies, PowerShares U.S. Dollar Index Bullish (NYSEArca: UUP) call buying has resumed as has put buying in CurrencyShares Euro (NYSEArca: FXE) and call buying in ProShares UltraShort Euro (NYSEArca: EUO) and last week’s action in the Euro largely mirrored the sentiments of these options flows.
From a technical standpoint in the S&P 500, we see resistance at 1374-1375, which was nearly touched last Friday, and in the Nasdaq-100 overhead resistance sits at 2643 and 2650. Early in the week we saw pressure and large net inflows in the small cap space, specifically in iShares Russell 2000 (NYSEArca: IWM) where more than $1.2 billion flowed out of the fund via redemptions, but when Friday rolled around, nearly half of these assets re-appeared in the fund through creations.
Similarly, after a short and sudden spike in the VIX after Tuesday’s sell-off, recent large inflows in VIX products including iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) reversed course and we saw sizable outflows instead. The VIX itself followed a volatile path last week, rising steeply and suddenly from the $17s to as high as $21.24 last Tuesday, but closing the week at $17.11. [Volatility ETFs See Outflows as VIX Nears 1-Year Low]
Some market participants continue to observe that the “volatility of the VIX” itself still remains near unprecedented levels. Finally, a familiar trade that has surfaced from time to time over the past several years is the “Bearish Long Term Treasury Bond” trade, and typically we will see a trend of call buying in ProShares UltraShort 20+ Year Treasury Bond (NYSEArca: TBT) and put buying in iShares Barclays 20+ Year Treasury Bond (NYSEArca: TLT) as well as accelerated volume and activity in Direxion Daily 20 Plus Year Treasury Bear 3X (NYSEArca: TMV).
The “Bond Bears” are speculating on rising yields and thus lower prices in longer dates Treasuries and some would argue that if this trade turned out to be directionally correct over a longer period of time, this would be bullish for equities as well since many assets currently invested in longer dated treasuries may migrate over to other asset classes.
In the past week or so, this trade has gathered some momentum, and we note that TLT over the past three sessions has fallen once again below its 50 day moving average, but we will be watchful to see how long it stays there. Since October of last year, dips below the 50 day moving average in TLT have only been temporary “stalls”, and the Long Bond has simply continued its uptrend despite these brief hiccups and despite longer dated treasuries still delivering relatively low yields. Interestingly, despite the bearish price action last week in TLT, the fund itself was near the top of the list last week in terms of inflows via creations, as about $300 million entered the ETF.
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