Last week began with equity markets leading off on solid footing with the S&P 500 trading as high as 1391.74 last Monday. But momentum quickly faded by midweek as major liquidity provider/market maker, Knight Capital Group (NYSE: KCG) in both Equities and ETFs failed investors last Wednesday, causing the stock to go into a complete free-fall ($10 price range last Wednesday and traded as low as $2.27) before rebounding somewhat to end the week.
Wednesday of last week was vaguely reminiscent of the May of 2010 “Flash Crash” where ETFs were to blame according to most uninformed media types, when in reality there was a system wide “outage” in data feeds and price calculations, causing many clearly erroneous trades to occur. Last Wednesday’s fiasco was much different, as the system issues seem relegated to one firm, and not at all a “contagion” that affected other financial trading firms. In fact, the market seems to agree with this logic as well, for despite a hiccup in performance on Wednesday, with the SPX dipping as low as 1354 intraday, stocks rallied to finish the week on strong economic data at 1390.99 and seem poised to break out further as we move into August.
A “bull” August is certainly what investors would love to see given last year’s carnage, and now with the market digesting poor AAPL earnings several weeks ago, and now a major trading glitch from a huge market participant (KCG), and still trotting higher, it’s no wonder the VIX is trading at a depressed $15.64 level. Even mighty Treasury Bonds, which continue to catch a bid in all seasons and circumstances these days as soon as “fear” rears its ugly head, fell sharply on Friday as stocks rallied. [5 Lessons for ETF Investors After the Knight Meltdown]
TLT (iShares Barclays 20+ Year Treasury Bond) for instance, which most use as a proxy for the Long Bond, traded as low as $126.77 on Friday before finding support on its 50 day moving average. Amid this move, we saw renewed interest in “Bear Treasury” products including TBT (ProShares UltraShort 20+ Year Treasury Bond) and TMV (Direxion Daily 20 Year Plus Treasury Bear 3x) via outright buying of the ETFs and/or via options in the ETFs, as well as via measured put buying in TLT.
Technically, the SPX has solid support at the 1375 level if it were to dip there, and of course upside resistance at this juncture lies at 1400 and if not for any other reason, it is psychological in nature.
Fund flows for the week reflected a mixed picture once again, but are decidedly leaning more toward “Risk On” than in previous weeks. SPY and VWO (Vanguard Emerging Markets) led all ETFs in net creation activity last week, reeling in $5 billion and more than $1 billion in new assets respectively. QQQ also took in more than $700 million and we note that AAPL (the number one holding in the Nasdaq 100 with roughly an 18% weighting), despite taking a small beating after its recent earnings report, has rebounded to challenge recent highs which is certainly a bullish sign not only for the Tech sector but for the equity markets on the whole. DIA (SPDR Dow Jones Industrial Average) also took in about $500 million last week, and a number of fixed income ETFs were also among fund flow leaders.