So what saved the equity markets last week if it wasn’t mighty AAPL stock, which closed the week down more than 4%? Once again, it appeared to be the “Not So Invisible Hand” of central banks as European headlines once more carried substantially more weight here in the United States than actual events and company driven developments (such as AAPL’s earnings). Fans of classical economics and Adam Smith will recall the references in his writings to the “Invisible Hand” of governments and central banks and their roles in influencing the economies and securities markets of the world. Lately in today’s equity and fixed income markets, one seemingly can scrap fundamental and security specific analysis and simply become as granular as guessing on how the next coordinated, or singular central bank move or headline will influence stocks and bonds direction wise, and run portfolios accordingly. Is this an easy task? Absolutely not, as short sellers on Friday at a level of previous technical resistance in the SPX (1375) will tell you (SPX closed as we mentioned above 1385 to end the week).
After briefly trading as high as $21.00 following AAPL’s earnings report, the VIX quickly plunged, closing Friday once again with a relatively low $16 handle (those who vividly recall this time in the markets last summer, the VIX was around these levels and on its way to as high as $48.00 by last August). Themes from the options markets that we have been monitoring include put buying in broad based products such as SPY, IWM (iShares Russell 2000) and EEM (iShares MSCI Emerging Markets) for instance, despite the recent run up in equity prices across the board.
Call buyers have been present however in some cases, but specifically in areas including Gold, via GLD (SPDR Gold) and IAU (iShares Gold), as well as in Gold Miners via GDX (Market Vectors Gold Miners) calls to be more specific. If we examine net fund flows from last week, a gigantic $7 billion was yanked collectively from broad based, popular ETFs including SPY (SPDR S&P 500), QQQ (PowerShares Nasdaq 100) and IWM for example, and the leading ETFs in terms of inflows (and we note that in terms of dollar inflows, none of these funds took in more than $200 million last week) across the landscape of all ETFs were a dividend/quality equity based product, DVY (iShares DJ Dividend Select), a high yield corporate bond product, JNK (SPDR High Yield Bond), BOND (PIMCO Total Return), XLP (SPDR Consumer Staples), and TLT (iShares 20+ Year Treasury Bond). These ETFs have a few things common even to the casual observer, and that is they are all relatively conservative “yield” plays as opposed to “beta”, nor much less “high beta” plays.
This tells us that on the whole, market participants and investors were not at all prepared for this sudden European salvation headline driven rally, and loads of cash are freshly on the sidelines and ready to react to whatever this coming week may bring us.
As we close out July and head into August, which was such a nasty month last year to most institutional portfolio managers and the clients that they serve in terms of overall 2011 performance, we find it hard to believe given the fact that “the news is on the tape” and there is a massive amount of cash on the sidelines that will need to position itself somewhere to close out the remaining quarters of 2012, that the market will revisit last year’s lows. But then again, as we saw last week after Apple’s (and the market’s) brief flirtation with disaster, anything can happen.
For more information on Street One ETF research and ETF trade execution/liquidity services, contact [email protected].