Last week institutional equity volume swelled mid-week, before tapering off during Friday’s session, and the SPX finished below its 50 day moving average (Friday close of 1335.02) after rising above this level earlier in the week.
Headlines out of Europe continue to be “market movers,” and it was refreshing to see volumes return to the markets for the first time notably since the Memorial Day holiday several weeks back. Despite the wide trading range in the SPX last week, having an ultimate high of 1363.46 and low of 1324.41 intra-week, the VIX (CBOE Volatility Index) staggered lower for the most part, and has been trading below its 50 day moving average now for the past five sessions.
Most market followers would be surprised we think to see an SPX with a 1325-1335 handle corresponding with a VIX below $20, given the fact that we saw a VIX with a $24-$27 handle several weeks prior, amid the same ongoing unrest in Europe. This said, a waning VIX, as well as longer term Treasury Bonds failing to rally substantially given Thursday’s steep equity sell-off, seems to be providing clues that institutional participants may finally be “comfortable” going into the remainder of the summer in terms of where they sit via equity allocations and hedges that may or may not be in place.
One observation that is not terribly surprising given the level of assets that flooded out of these funds in recent weeks throughout most of May and much of June, is that Emerging Markets based ETFs caught a bid all last week and net creation activity was evident.
For example, VWO (Vanguard Emerging Markets) reeled in more than $600 million on the week, and was the overall leader in net creation activity last week among all ETFs, and peer EEM (iShares MSCI Emerging Markets) was also among net creation leaders, reeling in nearly $300 million in new assets.
Throughout January and February of this year, we highlighted in these weekly recaps, large institutional accumulation in the billions of dollars taking place, only to see a great deal of these assets spill out of these two ETFs during the steep May sell-off in equities. Being of a “higher beta” nature than say the S&P 500, these EM funds that are highly concentrated to China, Brazil, India, and Russia for example, are largely utilized by managers that seek non-domestic equity exposure, and are likely looking for out-sized returns and are willing to take more risk than say an investment in fixed income, or even U.S. domestic equities for example. XLF (SPDR Financials), was among net inflows leaders as well, as the fund took in $500 million.
U.S. Financials, like Emerging Markets, are also considered higher beta equity exposure, and the sector ETF has rallied back reasonably well in the past month in a “post JP Morgan trading disaster” scenario, with XLF rising 1.92% versus the SPX up 0.87% during the same time frame. Year to date, the Financials remain a relative strength leader, up 10.23% with the SPX up 6.30%. However, although we witnessed these type of inflows last week, we note that the actual notional amount of dollars “created” in both Financials and EM funds last week, was not a huge, substantial number, as we have seen net flows on a week to week basis that sum in the $1 to $10 billion range in some cases.
This could simply be a by-product of wavering institutional sentiment as we head into the final days of June. Similarly, even though we saw “high beta” equity names leading the way last week in net asset inflow activity, there do seem to be some mixed signals out there as SPLV (PowerShares S&P 500 Low Volatility) reeled in an impressive $400 million, and GLD (SPDR Gold), OEF (iShares S&P 100), and XLV (SPDR Healthcare) were all among fund flows leaders last week.
One could make an argument just by briefly browsing through this list of ETFs that flows appeared to be “defensive”, in selecting conservative, lower “vol” S&P type names and/or in the case of GLD, the desire for hard assets seems to be present as well. On the outflows side, SPY and IVV (iShares S&P 500), which track the same index, lost a collective $1.5 billion last week, and IWM (iShares Russell 2000) spilled at least $400 million in assets as well.
A lighter trader, IWR (iShares Russell Midcap), saw more than $500 million leave the fund as well. This could simply be institutional mid-year rebalancing, and like the “inflows” side of the equation, the real notional dollar amounts of funds entering and leaving ETFs last week via creations/redemptions were relatively low compared to the typical weekly turnover. Finally, our eyes will be on the MLP space as well, as late in the week JP Morgan, the bank behind AMJ (Alerian MLP ETN), announced that they have halted creations in the product, which led to the fund trading to a slight, but meaningful premium to close out the week.
Likely not coincidentally, the fund saw more than $500 million enter the fund last week alone, and one can look back no further than the infamous “TVIX” fiasco that occurred earlier this year as winter was winding down to see how exogenous action from the bank issuer of an ETN can affect the product’s pricing in the secondary market, and how the dynamics of trading in a particular product can be forever transposed.
This week, we enter another “wait and see….and listen” scenario regarding any “headline” shocks that may come out of Europe, but this environment is not at all new for investors whom remember the summer of 2011 well. From a technical standpoint, the SPX does have support at the 1325 level, which has been challenged twice in recent sessions, and short interest via SPX options and futures remains very high down in the 1310 to the 1300 levels. This said, we would expect short covering aggressors to enter the market on any pullback below 1325, especially on any gaps down to the 1310-1300 level in cleaning up this remaining short interest. Perhaps those whom have been waiting on the sidelines all year, or those that wisely got out early in May, will look at valuations around those levels with appeal and also look to establish equity positions heading into the second half of this year.
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