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.
That said, there is obviously a ton of interested, and available assets on the sidelines that were previously invested in funds including EEM (iShares MSCI Emerging Markets) and VWO (Vanguard Emerging Markets) for existence, as well as EFA (iShares MSCI EAFE) for example, and as market participants feel more confident in terms of direction in this market, they very well will reach for higher beta segments of the the equity markets, which typically includes Emerging Markets (the BRICs of course) and will likely include U.S. Technology and Financials sectors as well in the near term.
The VIX spent the latter part of the week parked below its 200 day moving average, after peaking earlier in the week as high as $27.73, and a decline here would certainly make equity bulls sleep easier at night. Similarly, after what nearly resembled a run on longer dated U.S. Treasury Bonds going into last week occurred, as we saw TLT (iShares Barclays 20+ Year Treasury Bond) peak as high as $130.38 just 6 trading sessions ago, yields raced higher to end the week as Treasury bond prices largely caved in on heavy trading volume in the underlying ETF products and the bonds themselves. This sudden “reversal” in an end of May flight to quality, is also a potential signal that there may be some “relief” for equities in the near term as we approach the summer.
In signs that there was a swift reversal to the recent trend of “de-leveraging” and “risk off” in institutional portfolios, last week, the fund flows leaders in terms of inflows were as one would expect, largely the higher beta names including Technology, Small Caps, and Emerging Markets. Specifically, QQQ (Powershares QQQ Trust) took in more than $1.1 billion alone after several weeks of steady cash outflows, followed by IWM (iShares Russell 2000) and VWO (Vanguard Emerging Markets) with collectively $1.4 billion in inflows via creation activity.
Lightly traded IFGL (iShares FTSE EPRA/NAREIT Developed Real Estate Ex-U.S.) also had a monster week, netting nearly $400 million in asset inflows on trading volume that dwarfs any activity previously occurring in this fund’s history. Additionally, XLF (SPDR Financials), another “higher beta” sector that has trailed the broad market lately, but is still net outpacing the S&P 500 year to date (XLF up 8.68% YTD versus S&P 500 up 6.07%) also took in assets, to the tune of about $350 million. There were some positive asset inflows however into a handful of more conservative fixed income ETF products as well last week, which likely is an indication that some are still concerned that equities have more downside. BSV (Vanguard Short Term Bond), TLT (iShares Barclays 20+ Year Treasury Bond), BND (Vanguard Total Bond Market), and AGG (iShares Aggregate Bond) also were among the leaders in net creation activity last week, reeling in $1.2 billion.
On the other side of the equation, SPY led all ETFs in terms of net redemption activity, losing more than $2.2 billion. It is possible that institutional managers reallocated a considerable amount away from the S&P 500 benchmark index and into higher beta, or riskier segments of the market such as some of the aforementioned funds (Emerging Markets, Small Caps, etc.). Several Vanguard funds that recently saw heavy creation activity that we highlighted on previous weekend recaps actually experienced large net outflows last week, including VB (Small Cap), VO (Mid Cap), VBK (Small Cap Growth), VTV (Value), VBR (Small Cap Value), VUG (Growth), losing a total of more than $3 billion during the week.
Going into this week, all eyes will be focused squarely, unfortunately but inevitably, on any repercussions that arise from Greece’s Sunday elections that may influence the country’s stay or departure from the Eurozone. From a technical standpoint, market observers will watch the SPX closely to see if momentum from recent sessions continues, and it would also be encouraging for bulls to see a relative strength leader that had previously lost a ton of steam in the month of May (Technology, see QQQ and primarily top component weighting AAPL) break out of its recent funk and re-assume its leadership of the market that it displayed during the first 3 to 4 months of 2012.
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