Exchange traded funds tracking the technology and financial sectors are powering the stock rally as the blue-chip S&P 500 breaks through the 1400 level.
Equities have been rising since the Federal Reserve announcement last week. The S&P 500 closed on Friday at 1404.17 and is above 1400 for the first time since 2008.
According to our market technician David Chojnacki, a former resistance level, SPX 1375, now provides near term support, while he sees mild resistance at 1412 but is leaning towards us testing SPX 1425. Going back to the early part of 2012 we noted the relative strength and leadership of both Technology and Financials, and both sectors continued to lead the way last week.
The NDX (Nasdaq 100) closed above 2700, and this level as well as NDX 2675 look to be near term support levels.
Apple (NasdaqGS: AAPL), the largest weighting in the NDX at about 15%, briefly eclipsed $600 last week before giving up some gains to close the week at $585.57. The company announced a dividend and share buyback plan on Monday. [Nasdaq-100 ETF Higher on Apple Dividend]
Trading volume in Financial Select Sector SPDR (NYSEArca: XLF) was abnormally high throughout last week, and the ETF spiked to its highest levels since last spring.
Top holdings in XLF including JPM and WFC literally gapped higher the day of the Fed FOMC announcement (Tuesday), and never looked back. On that note, XLF was the second biggest recipient of asset inflows last week in the ETF universe, with the fund taking in over $600 million in new assets via creations.
Other sector based equity ETFs were also active last week as XLP, XLY, and XLE took in about $800 million in new assets collectively. The leader in inflows in all ETFs was SPY taking in a lofty $9 billion last week as it appears that institutional managers that are under-allocated to stocks began to throw in the towel last week and at least grab for benchmark index exposure via S&P 500 tracking ETFs.
We highlighted larger outflows in iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) recently, and this week we actually saw more than 30% of the fund’s assets under management flow into the fund via creations, as the ETN took in more than $400 million. [VIX ETFs: Beware Contango]
The VIX index itself remains depressed, falling below $14 on several occasions last week and finishing the week at $14.47. Late last week we noted mostly put buyers in VXX, likely speculating on continued downside in the VIX and related ETF/ETN products. Changing the channel away from equities, some of the most interesting activity last week occurred in fixed income ETFs.
We highlighted the presence of “bearish U.S Treasury” speculators for several months now, and last week, these traders that have primarily been building positions in iShares Barclays 20+ Year Treasury (NYSEArca: TLT) puts and ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) calls (as well as long positions in TBT and related ETF, TMV) literally cashed in on this trade. [ETF Chart of the Day: Treasuries]
U.S. Treasury prices fell sharply last week in short, mid term, as well as longer dated products (yields rose) following the Fed’s Tuesday decision, and TLT continued its sharp cascade lower. After clinging to its 50 day moving average for several months on end, TLT fell from the $116 level through $111 at one point, finding eventual support at its 200 day moving average. Trading volume was enormous compared to the average daily levels, with more than 25 million shares trading in TLT last Wednesday alone. Other areas of the fixed income market were not spared, as shorter duration treasuries and related ETFs, such as SHY and IEF, also fell sharply, but unlike TLT, regathered significant upside momentum going into the end of last week.
Investment Grade corporate bond ETFs were exceptionally active as well, as we saw funds such as LQD and VCSH trade heavy volumes, mostly under significant selling pressure last week although there were some buyers on this weakness in spots. LQD in fact actually took in about $300 million in net creations last week while TLT lost nearly $200 million and SHY about $170 million in redemptions.
Options volumes in TLT and TBT spiked late last week as well, as it had the feeling of almost a “pile on” trade, with those whom are already “short” U.S. Treasuries in some way, shape, or form, adding to positions aggressively on the way down as prices in the long bond fell. From a “macro” perspective, the timing of these large price moves in the Bond market coincided with the Fed’s Tuesday rate decision last week, and the whole confluence of events had the feel of significant institutional asset allocation or “model” changes, where treasuries and to some degree investment grade corporate bonds were being sold in a wholesale manner to buy U.S. equities, and thus explaining the nature of the net creation/redemption activity for the week.
The writing has been on the wall for months in regards to higher yields and thus lower prices in U.S. treasuries, but the bearish speculations never meshed with reality until last week as the stubborn long bond refused to sell off in any significant manner. Last week’s action abruptly ended the resilience of the long bond, and one can easily see this by simply looking at a chart of TLT for instance. It will be interesting to see if TLT maintains some support around its 200 day moving average as it did last Friday, and if some of the shorts via TLT puts and calls in TBT, and/or long positions in the ETFs TBT and TMV begin to cover their positions and take profits, or if they are willing to ride them out further, betting on furthering weakening in Treasury prices (and thus higher yields).
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