ETF Trends
ETF Trends

While summer only officially begins this coming Thursday on June 21st, the outlook for the season has improved greatly in recent days following this weekend’s news coming out of Europe supporting a Greek bailout.

This news, coupled with a thrilling final round in the U.S. Open and the NBA Finals all on a glorious Father’s Day holiday, has given market participants some hope going into this week that we may not repeat last year’s dismal summer in the markets.

Our market technician David Chojnacki has pointed out over the past several weeks the technical resistance and congestion in the SPX (S&P 500 Index) 1319-1325 area, but beginning last Thursday and following through on Friday, equities surmounted these levels and closed at a resounding 1342.84 on Friday, up more than 1% on the session. Volumes were particularly impressive, especially on last Thursday, as it feels that institutional participation did re-engage itself at least towards the end of last week, something that has largely been lacking since well before the Memorial Day holiday in the markets. ETF/Index options last week lacked major “directional” trading activity, although we have seen consistent players of the “volatility” of the VIX, largely purchasing both puts and calls in the index, speculating on larger moves in the VIX itself (but uncertain of direction), going into the next several months.

We note that the VIX itself had an intra-week range last week of $19.63 all the way up to $24.93 and literally bounced off of both its 50 day and 200 day moving averages on several occasions in a channel. With equity futures looking higher in the overnight session going into Monday’s market open, we would expect the VIX to revisit recent lows tomorrow and likely fall beneath its 50 day moving average once more. Elsewhere, even though equities broke out to recent highs last Friday, we simultaneously saw bids in longer dated U.S. Treasury Bonds, with TLT (iShares Barclays 20+ Year Treasury Bond) for instance rallying to its highest close in seven sessions. To us, this reflects institutional caution in the marketplace going into this past weekend’s Greek bailout votes, and those still hesitant to embrace equities still seem comforted by the thought of parking their funds in long term U.S. Treasuries despite the recent price hit that the Bonds have taken.

Fund flows last week on the creation side were enormous compared similar data we have observed over the past several months. For instance, SPY (SPDR S&P 500) took in more than $8 billion alone last week, followed by QQQ (PowerShares QQQ) reeling in more than $1.1 billion. Evidently, monies moved into Large Cap equity products, and perhaps relative strength leaders of the past are being embraced again.

Notably, AAPL has a sizable 17.98% weighting in the Nasdaq 100 Index, and it is also the largest weighting in the S&P 500 Index (both indexes are calculated using a market capitalization weighting metric) at 4.54%. We have pointed out throughout this year that AAPL, and the technology sector along with it, have consistently outpaced the broad markets in 2012 although they both did stumble in recent months. Currently, AAPL has rallied 41.75% YTD while the Nasdaq 100 is up 12.82% and the S&P 500 has increased 6.84%. From a technical standpoint, the NDX closed well above recent resistance at 2550 (last Friday’s close was at 2571.23), and it will likely challenge its 50 day moving average in the near term.

Interestingly however, despite the obvious reinstatement in appetite for Large Cap broad based equity index ETFs last week, we did see net inflows in a number of sector equity ETFs that are typically considered “defensive.” XLU (SPDR Utilities), XLP (SPDR Consumer Staples), and XLY (SPDR Consumer Discretionary) collectively brought in about $1 billion in new assets via creation activity. Elsewhere, we also saw net inflows in a number of fixed income products last week, including CIU (iShares Barclays Intermediate Credit Bond, LQD (iShares Investment Grade Corporate Bond), and CSJ (iShares Barclays 1-3 Year Credit Bond), with collective flows of approximately $1.5 billion, which to us reflects institutional caution towards equities still, even with the recent broad move higher. From an outflows standpoint, net flows were simply not substantial compared to the inflows side of the equation.

The largest outflows occurred in FXI (iShares China), which lost about $300 million, but compared to the approximately $10 billion that collectively flowed into both SPY and QQQ last week, it was clear that appetite for equities on the long side increased going into the weekend.

Both the NDX and SPX will likely eclipse their 50 day moving averages early in this week on reciprocal strength in equities stemming from the news in Europe from this weekend’s vote, and it will pivotal for the markets if this upward momentum can continue to challenge levels that have not been seen since the early May fallout that occurred across markets. Our eyes will be fixed on the specific sectors and leaders that brought the markets to their highs of 2012 back in early April and early May, which as mentioned earlier is focused on Technology (which is hard to ignore given the heft of AAPL’s weighting in the index and the stock’s refusal to call it quits – despite the market turmoil throughout May and part of June, the stock is only 10% off of its all time high).

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