After a precarious dip the week prior, equities as measured by the SPX (S&P 500 Index) spent all of last week north of the 1300 level.
U.S. stocks opened higher Tuesday after the holiday weekend as the SPX added 10 points and the Dow rose 100 points.
Closing at 1317.82 last Friday, our market technician David Chojnacki pointed out throughout last week that the SPX has technical support at 1312 and 1300 although there is overhead resistance at both 1320-1325 and 1337. However, we continue to see daily headlines regarding Europe, in any way shape or form, having the ability to move markets not only temporarily, but seemingly for days, if not weeks on end in one direction or the other. For it was just two months ago in mid March where the daily “tone” of the U.S. equity markets were briefly relieved from its Euro hangover as the SPX challenged new highs in spite of the presence of a falling Euro.
Now however, with the Euro hitting new recent lows it seems day after day, U.S. equity markets feel hinged again to the movements of the currency, which, based on last summer’s fallout and symptoms, leaves everyone with a very uneasy feeling as we work our way into June still recalling the pain of the late summer of 2011. An encouraging sign, although it has not happened in recent recollection and certainly not during the month of May, would be to see a rally in U.S. equities concurrent with additional weakness in the Euro, and or even a stable to flat Euro move, but this still remains to be seen if it will ever indeed occur again.
ETF options flows were rather light last week, with little to note in directional trades being established the week after May options expiration, although we do continue to see caution in the Financials sector which has recently been trounced by JP Morgan’s (NYSE: JPM) announcement of a large trading (or hedging, depending on whom you speak to) loss. Put buying has been in vogue in the sector for at least three weeks now (and we have seen strikes as low as 12 and 11 trade, given Financial Select Sector SPDR (NYSEArca: XLF) had a $15 plus handle just a month ago), but one is tempted to think the selling pressure may well be overdone, and perhaps “value” buyers will rear there heads one of these days. In fact, based on net flows data last week (we will go in more depth below), some institutional “nibbling” in the sector was evident last week.
Fund flows last week on the inflows side were dominated by SPY for a change, as readers will recall that the ETF has been the leader for several weeks now on the outflows front. More than $1.8 billion entered the fund via creation activity last week. Similarly, a number of S&P 500 large cap sector ETFs also saw net inflows, namely XLF, XLI (SPDR Industrials), XLY (SPDR Consumer Discretionary), XLB (SPDR Basic Materials), and IYR (iShares REIT) which took in $1.7 billion collectively. However, a handful of fixed income products also saw considerable net creation activity, which has been the theme for most of May as there has been an evident “risk off” shift in institutional asset allocation this month.
Vanguard Total Bond Market (NYSEArca: BND), iShares Barclays 20+ Year Treasury Bond (NYSEArca: TLT), and iShares Barclays 1-3 Year Treasury Bond (NYSEArca: SHY) all accumulated assets, to the tune of about $1 billion in total. The Energy sector was a drag from a fund redemption standpoint last week, as XLE (SPDR Energy) lost more than $1.1 billion in assets, which is simply a huge weekly figure for this, or any sector oriented fund in fact. It is hard to say exactly what may have occurred other than institutional types likely making tactical shifts from one sector to another given their future outlooks. Crude Oil itself has continued to weaken throughout the month, even given last week’s steady climb for the most part in equities, and it is possible that some whom have been calling for higher oil throughout this summer and fall are throwing in the towel on such a bet, and thus are also folding on the related Oil/Energy equities.
Also on the outflows side, High Yield Corporate Bond funds continue to bleed assets, as we mentioned a huge JNK (SPDR Barclays High Yield Bond) outflow in recent weeks, and the fund lost another $500 million last week. Similarly, a related fund, HYG (iShares High Yield Corporate Bond) also saw more than $250 million leave its gates. Other assets, that along with high yield bonds that would typically be consider “higher beta” or “risky” plays such as Small Cap equities, also net lost assets last week. IJS (iShares S&P 600 Small Cap Value) and IWM (iShares Russell 2000) saw $700 million flow out, as did Techs via QQQ (PowerShares QQQ Trust), which lost more than $400 million. Also, in a rocky week in terms of price action amidst heavy trading volumes at times, the popular GLD (SPDR Gold) lost more than $400 million in terms of net redemption activity (and rumored selling pressure from several global macro hedge fund managers whom harbor very large positions) and the fund remains well below both its 50 and 200 day moving averages. [Gold ETFs Rise on Central Bank Buying]
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Full disclosure: Tom Lydon’s clients own HYG and GLD.