ETFs Scream Risk-Off

ETF Trends

Exchange traded funds hitched to virtually every asset class are flashing serious warning signs as markets react with fear to the possibility of a Greek exit from the euro.

Whether you look at ETFs tracking stocks, bonds, commodities or currencies, it’s not a pretty picture. The Dow was down more than 150 points in midday trading Wednesday.

Across the board, ETFs are clearly saying investors are scared of deflation and the ripple effects if Greece does in fact leave the euro.

  • U.S. stocks: SPDR S&P 500 (SPY - News) is threatening to fall below the 200-day exponential moving average. This could trigger more selling since many trend followers use the technical indicator for their buy and sell signals.
  • Currencies: The surge in PowerShares DB US Dollar Index Bullish (UUP - News) in May is another example of the risk-off trade. Meanwhile, CurrencyShares Euro Trust (FXE - News) is trading at the lowest level of 2012.
  • U.S. Treasuries: The iShares Barclays 20+ Year Treasury (TLT - News) has rallied to a one-year high. Yields on the 10-year note are hovering around 1.7%. Clearly, investors are more worried about return of capital than return on capital. [Treasury ETF Rally Threatens Stocks]
  • Commodities: The sell-off in iPath Copper ETN (JJC - News) also illustrates the strong deflationary forces in play. Copper is seen as a leading indicator for the global economy. The red metal is breaking a key support level and could see more downside after breaking from a flag pattern, observes Chris Kimble at Kimble Charting Solutions. Meanwhile, the sell-off in U.S. Oil Fund (USO - News) means less pain at the pump but falling oil prices are another harbinger of softness in the global economy.
  • Credit: The riskier areas of the debt market are under pressure as credit spreads widen. Weakness in junk bond ETFs such as SPDR Barclays Capital High Yield Bond (JNK - News) and emerging market debt funds such as iShares JP Morgan USD Emerging Markets Bond (EMB - News) demonstrate investors’ unease over European debt and the health of the global economy. Emerging market debt and junk debt have collapsed relative to U.S. Treasuries “in a way that suggests a credit event may be upon us,” writes Michael Gayed at MarketWatch.

SPDR S&P 500

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CurrencyShares Euro Trust

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iShares Barclays 20+ Year Treasury

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iPath Copper ETN

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iShares JP Morgan USD Emerging Markets Bond

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SPDR Barclays Capital High Yield Bond

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Full disclosure: Tom Lydon’s clients own SPY and EMB.

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