Equities more than erased weakness early last week, finishing Friday on a high note and “gap up” in the S&P 500, ultimately closing at 1344.90 and reaching its highest levels since last summer.
Our market technician David Chojnacki now points out that support exists from a technical standpoint in SPX both at 1313 and 1300. The Nasdaq 100-100 Index continued to display leadership, a theme we have spoken about for several months, and actually closed Friday at 2529.17, above what we saw as technical resistance (2500 and 2515 in the index provided resistance).
What seems like an insatiable appetite for equities in the early going here in 2012 can be seen in the VIX (CBOE Volatility Index) as well, as it closed Friday with a 17 handle, and it is mired in contango (where distant month futures are significantly more expensive than near month futures).
In fact, several months ago in early November we spoke about a pick up in activity in several VIX related ETNs including VelocityShares Daily Inverse VIX Short Term ETN (NYSEArca: XIV - News) and the product has rallied an astounding 76% from its early December 2011 lows as the the gradual trending melt down in the VIX itself coupled with contango has propelled this ETN higher in a relatively short amount of time.
On that note, trading volumes were huge on Friday and last week in general in VIX products, especially VelocityShares Daily 2X VIX Short Term ETN (NYSEArca: TVIX - News) and ProShares VIX Short Term Futures ETF (NYSEArca: VIXY - News) . From the ETF/Index options side of the business, we continue to notice measured downside protective put buying in products such as iShares Russell 2000 (NYSEArca: IWM - News) and SPDR S&P 500 (NYSEArca: SPY - News), which is likely a reflection of some institutional “caution” regarding this 2012 rally, and also managers taking advantage of benign levels in the VIX and establishing portfolio protection at attractive levels.
From a fund flows standpoint, and at the risk of sounding like a broken record, we need to address huge inflows in Emerging Markets ETFs once more. Vanguard Emerging Markets (NYSEArca: VWO - News) took in an impressive $1 billion once more last week after several strong weeks throughout January of steady inflows as well. [Investors Flock to Emerging Market ETFs]
The iShares MSCI Emerging Markets (NYSEArca: EEM - News) also accumulated over $1 billion in new assets via net creation activity, demonstrating that these are genuine inflows from institutional managers and not simply “swaps” from one MSCI Emerging Markets Index fund to another (i.e. they are not “net zero” trades).
PowerShares QQQ (NasdaqGM: QQQ - News), which tracks the NDX which we mentioned above, also turned in a strong showing with $1 billion entering the fund last week. Following up from recent momentum was also SPDR Barclays Capital High Yield Bond (NYSEArca: JNK - News), which took in nearly $400 million in new assets and we spoke just last week of a “risk on” effect taking place in the corporate bond space via creation activity in JNK and iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG - News) specifically that occurred in late January.
From an outflows standpoint, SPY lost about $3 billion in outflows despite the strength in the market, particularly on Friday. It seems that portfolio managers have been taking profits into the S&P 500 rally and are likely moving these proceeds into areas such as Emerging Markets or perhaps even to Technology via QQQ.
A sector specific ETF also saw heavy outflows, and that was Energy Select Sector SPDR (NYSEArca: XLE - News), as $1 billion left the fund as the ETF attempts to break out of a narrow trading channel. On that note, Oil, the commodity itself has been petering out lately so it is very possible that managers foresee weakness in Oil related equities and are simply leaving the sector for more appealing return possibilities elsewhere. Also on the outflows side, we saw about 15% of the assets outstanding in Currencyshares Japanese Yen (NYSEArca: FXY - News) leave the fund last week into recent strength in the currency itself. Likewise, heavier redemptions were also noted in iShares Hong Kong (NYSEArca: EWH - News) as the ETF traded at multi-month highs.
It is clear that there has been some strategic rebalancing going on in institutional portfolios to begin the month of February, and we will continue to monitor such flows in the coming weeks in order to observe any sea change in events.
For more information on Street One ETF research and ETF trade execution/liquidity services, contact pweisbruch@streetonefinancial.com.
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