Market observers lamented tepid trading volume throughout last week in several rather uneventful sessions. However, if that was the only “bad news” the market had to offer, we would gamble that most still scarred investors whom recall the European/Euro driven equity sell-off this time last year, feel rather well thus far as we head into the third trading week of August.
The SPX actually surged impressively on Friday to reverse early morning weakness and closed with a 1405 handle. Absent last week were any major market moving statements that generally come out of Europe via ECB representatives, and we are also in a lull in terms not being in earnings season, so given the complacency that exists currently in the market (VIX closed on Friday at $14.74 and at its lowest levels since April), no news is good news as seen by last week’s activity. [VIX Keeps Falling Despite Rally Doubts]
From a technical standpoint, our market technician David Chojnacki pointed out last Friday that 1405 remains an area of technical resistance for the SPX (and thus we closed there to end the week), and there is support below at 1395 and 1388, along with more formidable support down at 1375 (if we were to get there). Recall that the 1375 level was important resistance before the market began to break out at the beginning of this month. The SPX scenario over the past few weeks in early August is a classic example of “old resistance becomes new support” in terms of technical analysis patterns.
Options trading was rather light as were volumes in underlying ETFs last week, with the presence of protective put buyers in small cap equities, via puts options in IWM (iShares Russell 2000), but this activity is generally interpreted as expected and quite normal given the relatively depressed levels of the VIX itself, and portfolio managers looking to lock in recent gains and perhaps purchase what looks like “inexpensive” portfolio protection. Late week call buyers did emerge as well, in ETFs including XLI (SPDR Industrials), EFA (iShares MSCI EAFE) and EEM (iShares MSCI Emerging Markets), suggesting that these market participants are looking for additional upside in equities heading into the end of the summer and going into the fall season.
Speaking of Emerging Markets, VWO (Vanguard Emerging Markets) was one of the top fund flows leaders last week in terms of attracting new assets as the ETF reeled in more than $400 million. IWM (iShares Russell 2000) led all ETFs in terms of inflows, with roughly $700 million entering the fund. XLE (SPDR Energy), QQQ (PowerShares QQQ Trust), and XLI (SPDR Industrials) were other leaders on the equity side in terms of inflows last week, collectively accumulating about $1.5 billion. Despite the healthy close of the SPX last week solidly above the 1400 level however, we still see institutional accumulation of fixed income products.
Specifically, UST (ProShares Ultra 7-10 Year Treasury Bond) took in a staggering $442 million last week, which equated to approximately 80% of the total assets in the fund at the time of the creation activity last week. UST is designed to provide twice the daily leveraged returns of the Barclays 7-10 Year Treasury Bond Index, and with treasuries falling rapidly last week into the face of recent equity strength, this institutional buyer of UST seems to be playing “contrarian” to the current “risk on” equity trend in the marketplace. These contrarians using UST must believe that the recent TBT (ProShares Ultra Short 20+ Year Treasury Bond) call buyers are dead wrong as well, since we have seen a recent acceleration of call buying in this leveraged/inverse product. [Options Trading Explodes in Bearish Treasury ETF]
TBT rises in price as longer dated Treasuries fall. Similarly, LQD (iShares Investment Grade Corporate Bond) also took in an impressive $200 million last week, solidifying the fund’s status as the largest fixed income ETF out there in terms of total assets under management (currently a lofty $23 billion plus). LQD owns paper from issuers including AT&T, Wells Fargo, Wal-Mart, and General Electric. The fund’s continued popularity with investors even as the equity market has generally stabilized, reflects that the marketplace is still attracted by yields offered by high grade corporate issuers, and perhaps an unwillingness to dive head first into higher beta equity exposure in the stock market. Thus, a quick takeaway from this could be that there is still “substantial” cash remaining on the sidelines in many cases, and not currently wholesale invested in equities.
Outflows leaders last week included SPY and DIA (SPDR DJ Industrials), losing a collective $3.5 billion, while IWF (iShares Russell 1000 Growth), SHY (iShares 1-3 Year Treasury Bond), and XLP (SPDR Consumer Staples) were also among the top ten in terms of redemptions. On the whole, net creation/redemption activity across the board was on relatively lighter levels in terms of absolute dollars compared to most weeks.
With last week’s atmosphere being one of “no news is good news,” bulls are likely encouraged to see us halfway through August with barely a tremor that looks anything like last year’s disastrous month of August which was fueled by European breakdown after breakdown. With equities challenging recent highs and the SPX over the 1400 “psychological level,” Treasuries finally receding last week in terms of prices falling and yields rising, those looking for a strong close to end 2012 will likely feel much more comfortable if we can close the book on August of 2012 on a high note, and perhaps begin to forget about some of last summer’s painful equity market memories.
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