For the first time in recent recollection we were able to go home this weekend and say that equity indices closed at their “highs for the week,” as the SPX logged a gain of 0.81% last Friday to close soundly above its 200 day moving average, at 1325.66.
Last week’s occurrences brought to mind a few simple, but oft repeated stock market mantras, such as “Don’t fight the tape” and “Don’t fight the Fed,” but in last week’s case, the theme was really “Don’t fight the Chinese central bank,” as both Emerging Markets and Developed Markets including beaten down European equities, roared to life after overnight news of the first rate cut by China’s central back since 2008 hit the tape. From peak to trough in the past 5 trading sessions, the S&P 500 has rallied 4.66%, a considerable move indeed at a time when most are of the opinion that “no one is really in their offices, as many have been out since the Memorial Day holiday weekend.”
Our market technician David Chojnacki notes the importance from a technical standpoint the 1320 area in the SPX, as this level is the 150 day SMA. Furthermore, the 20 day SMA of the SPX is 1316, and a 50% Fibonacci re-tracement level at 1320 exists as well, so the technical levels around 1320 indeed are a source of “congestion” in near term trading, with potential resistance points throughout that range. The fact that we held, and closed above this level to finish out the week, is indeed an encouraging sign for any near term momentum in these equity markets.
Speaking of China as well as Europe, as equity markets in both places were absolutely hammered throughout the month of May, several very large institutional options trades took place earlier last week, “before” markets really started to move upward.
VGK (Vanguard Europe), EFA (iShares MSCI EAFE), and FXI (iShares China) ETFs were extremely active, as institutional options players simultaneously sold downside puts, and purchased calls in all of these ETFs, making an extremely bullish bet (the specific trades are known as “bullish risk reversals” and are the domain mostly of sophisticated options players and global macro type funds) in the near term direction of Europe and the Emerging Markets.
We highlighted these trades in our Daily ETF research pieces that we send out to trading customers, and in hindsight, since the markets were a straight shot up basically throughout the rest of the week following this activity, the spotlighting of these trades proved very timely. In fact, similar trades also occurred in SPY (SPDR S&P 500), with the same general theme. Needless to say, the markets rallied throughout the rest of the week after investors breathed a sigh of relief mostly as the headlines (or lack of headlines) out of Europe seemed to have a more easing feel to them for once.
We read several reports late in the week that some of these trades, specifically the options trades in FXI, were actually being scrutinized by regulators for potential insider information regarding the rate cut that surprisingly came out of China. The bottom line is however, we have reported for several months that billions of dollars have poured out of the Emerging Markets segment in recent weeks (after a huge influx of assets from the beginning of 2012 through March) as “de-leveraging” in institutional portfolios has occurred on a wholesale level as markets weakened through May.