ETF Weekly Flow Wrap: Investors Position in Financials Before Election

ETF Trends

We have to point out that it was clearly a shortened week, as the markets were closed on Monday and Tuesday due to the unfortunate wrath and effects of Hurricane Sandy on the east coast. Our thoughts and prayers go out to all of those affected, as it forces all of us to take a step back and look at priorities in our own personal lives outside of “the markets.”

This aside, being that it was only a 3 trading session week, we saw sizable inflows late last week enacted by one large institutional manager (buying IJH, IEI, IWM in size), and some interesting flows in XLF (Financials) as well.

In fact, in addition to the creation activity that occurred in the ETF itself, buyers of custom 16 strike November 9th expiration calls were around last week in decent size. Based on the custom nature of these options and surrounding the anticipated U.S. Presidential elections next week, we can draw no other conclusion outside of “this is some sort of election play.”

Financials continue to exhibit impressive relative strength against the broad market, with XLF up 22.92% YTD versus the S&P 500 Index rallying 12.80%. In the trailing one month period, the story is still good as XLF is up 1.85%, despite the recent market turmoil, with the S&P 500 faltering 2.02% during this time frame. We also saw late week interest in upside calls in WTI Crude Oil futures, as well as similar looking flows in Oil linked ETF/ETNs (USO, USL, BNO, OIL, etc.) but we have not seen a huge amount of dollar flows yet in the space (likely a play on rising crude prices following the Hurricane, but we stand by to see if the trend holds). 

Top Asset INFLOWS (Creations) Notables (based on IndexUniverse.com data):

#1 SPY (SPDR S&P 500) $1.72 billion #2 IJH (iShares Core S&P Midcap) >$900 million #3 IEI (iShares 3-7 Year Treasury Bond) >$830 million #4 IWM (iShares Russell 2000) >$300 million #5 XLF (SPDR Financials) >$200 million

In another ugly session on a Friday where #1 weighting in the NDX, Apple (AAPL) floundered more than 3% and closed at a multi-month low, even plunging below its 200 day moving average, the stock closed at 576.80 versus 200 day MA of 588.63.

These “Apple Fridays” are becoming increasingly common in the past quarter, and we doubt that market participants have really come to grips yet with the fact that AAPL still remains a massive 19.74% weighting in the NDX, as well as being the top weighted holding in the SPX at 4.83% (the next highest weighting is XOM at 3.26%).

Not surprisingly, QQQ led all ETFs in outflows, likely from reciprocal effects of AAPL’s stock falling as of late. We wondered out loud in this missive a few weeks ago (10/18/12) on how long AAPL shareholders will tolerate the status quo in regards to the newer leadership at the company under Tim Cook.  Going into the weather shortened week last week, Cook did announce some significant executive reshuffling among some of his underlings. However, if the stock performance is any measure, the market didn’t like this either as we cannot recall the last time we saw AAPL stock crash through its 200 day moving average with such ease (to close out a very ugly week, weather and market wise) like it did on Friday.

Year to date, AAPL still has broadly outpaced the SPX, as it is still up 42.42% versus the next highest weighted components (XOM, which is up 6.50%), and GE which has rallied 18.98%. However, the market seems to be in 1986 Janet Jackson “What Have You Done For Me Lately” mode, with AAPL clearly being an albatross on both the SPX and the NDX (AAPL down 12.67% in the trailing one month period versus #2 weighting in NDX MSFT down only 0.54% and #3 weighting GOOG down 9.11%, also hit rather hard. The NDX itself is down only 5.09% during this same trailing one month time period, which would suggest that there is “some strength” somewhere. In examining the SPX in terms of trailing one month performance, the SPX is down 2.02% with AAPL of course down a stunning 12.67% and other leading components XOM down 1.58% and GE down 6.49%.

Without doing any complete dissection nor any complicated math, one can likely see that the lower tier names (as far as weightings) of these market cap weighted indices, both the S&P 500 and the Nasdaq 100 seem to be pulling the weight, at least recently. So perhaps the recent market carnage is simply a giant “profit take” specifically in AAPL and AAPL heavy ETF products heading into the uncertainty of the U.S. elections coupled with what looks like a hugely impactful exogenous event, the financial effects of Hurricane Sandy and exactly what the repercussions on the economy and policy may be (under the current or a new administration). Thus, as one might expect, the VIX (CBOE Volatility Index) which had spent the past several months as low as $13-$14, rose sharply on Friday to close at $17.59.

It does remain however slightly below its 200 day MA (17.76) and recent high of $19.65, so it should be monitored ever so closely early next week, especially as we receive more clarity surrounding the Hurricane Sandy situation as well as any inklings of how the elections will pan out. Thus, “long VIX” products were catching a bid on Friday, such as VXX, UVXY, and VIXM to name a few. We would expect to see additional volatility, as well as plays on volatility and likely defensive positioning until exogenous events namely the election and the most recent, the Hurricane, sort themselves out.

Absent several late last week larger ETF rebalance trades (i.e. IEI, IJH, IWM as mentioned above), market participants have largely been inactive in terms of making any major moves either way until the aforementioned situations clear themselves up.

Top Asset OUTFLOWS (Redemptions) Notables:

#1 QQQ (PowerShares QQQ) ->$600 million #2 XLB (SPDR Basic Materials) – $242 million #3 DIA (SPDR DJ Industrials) -$228 million #4 IYE (iShares DJ U.S. Energy) -$189 million #5 IVW (iShares S&P 500 Growth) -$151 million

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