For equities, last week began with much promise but unfortunately for bulls, the mood soured quickly and we finished the week with a sweeping sell-off on relatively heavy trading volumes. After trading at an intraday high of 1415.32 last Tuesday and showing signs of potentially challenging the early April highs, the S&P 500 reversed throughout the rest of the week, closing on Friday at 1369.10, down more than 1.6% and substantially below its 50 day moving average (1386.64).
Our market technician David Chojnacki pointed out in a note to trading customers on Friday morning that both the DJIA and SPX had their 20 day moving averages cross below their 50 day simple moving averages which is a sign of caution and could lead to a “whipsaw” effect for longs looking to establish positions.
Even more importantly, the relative strength leader since the market bottom in 2009, the NDX (Nasdaq 100) developed an “engulfing bear candle” technical pattern last Thursday and was absolutely trounced on Friday on a gap down, finishing down 2.47%. In the NDX, technical support that we observed at 2697 and 2688 were blown through on Friday, and SPX closed well below technical support at the 1375 level as well. As we have noted throughout 2012, Technology and Financials have been the relative strength leaders in the rally thus far this year (S&P 500 + 9.13% YTD, XLF +16.14%, QQQ +15.89%) but last week, both sectors under-performed the broad market (XLF -2.64% and QQQ -3.77% versus the S&P 500 down 2.46%).
We have had moves like this recently in the markets, throughout mid and late April actually as most will recall, prior to AAPL’s earnings release. AAPL did snap back after releasing earnings, but it appears that profit taking into the post earnings rally and perhaps new shorts looking for the stock to break down have pounced, driving it to close below its 50 day moving average on Friday at $565.25. With the stock carrying an 18.57% weighting in the NDX and being the top weighting in the SPX currently at 4.31%, the day to day moves of AAPL continue to be vital for U.S. equities in terms of where the leadership is, and where near term trends may lead. The VIX remained in check for most of the week with the exception on Friday, where it finally broke out, closing above $19 with a 9.11% gain. This is consistent with the majority of ETF/Index options flows that we have observed recently, which has consisted mostly of downside put buying, either outright or via put spreads in broad based products including IWM, SPY, SPX, EEM, and EFA for instance. A VIX related ETN, iPath S&P 500 VIX Short Term Futures ETN (VXX - News) , saw steady inflows for the second straight week, taking in nearly $200 million last week.
In terms of ETF fund flows, small caps were clearly not in favor as IWM led all ETFs in terms of outflows, losing approximately $1 billion. Likewise, Direxion Daily Small Cap Bear 3x (TZA - News) was very active throughout the week and reeled in more than $200 million and also saw active call buying. TZA delivers 3 times the daily inverse return of the Russell 2000 Index (and IWM is linked to the benchmark on the long side) and is generally used by bearish speculators and aggressive downside hedgers. Other equity ETFs that saw substantial outflows last week include IVV (iShares S&P 500) and QQQ, losing $800 million collectively. Leveraged “long” ETFs also ranked among the leaders in net outflows, which is a sign that institutional players and/or traders that may have loaded up on these products in the past week or so were “stopped” out as the equity markets seemed to hit a brick wall and reverse sharply to end the week. Specifically, UWM (ProShares Ultra Russell 2000) and SSO (ProShares Ultra S&P 500) lost about $500 million collectively via redemption activity, as did several non leveraged, sector equity ETFs, XLF (SPDR Financials), XLI (SPDR Industrials), and XLB (SPDR Basic Materials) which saw approximately $300 million collectively flow out of the funds.
Funds that saw creation activity included a number of fixed income related issues, perhaps a sign that institutional monies were parking assets in asset classes such as U.S. Treasuries in order to avoid further damage from the equity markets. Specifically, fund inflow leaders were SHY (iShares 1-3 U.S. Treasury Bond), IEI (iShares 3-7 Year Treasury), UST (ProShares Ultra 7-10 Year Treasury), JNK (SPDR High Yield Bond), CSJ (iShares 1-3 Year Credit Bond), and IEF (iShares 7-10 Year Treasury Bond). Collectively, the funds accumulated more than $2.2 billion in assets last week via creations, and this is the first time in recent recollection (in at least 7-8 months) that we saw weekly ETF inflows have such a heavy slant towards U.S. Treasuries, and in this case mostly short to medium duration bonds. Needless to say, after a steep corrective sell-off in mid March, Treasuries have rallied back sharply (and yields have fallen) and are challenging multi-month highs once again.
From a “macro” standpoint, the Euro finished the week significantly lower against the U.S. dollar and talk across trading desks mostly centered on the words “Greece”, “Austerity”, as well as “China” and “Slowdown” which have us recalling the big picture scenario from the summer of 2011 that rudely dragged equity indices lower. In fact, it all sounds like an unresolved broken record in reality. With treasuries catching a bid amid these renewed tensions and with short term technical levels in the major equity indices all of a sudden in serious jeopardy, the first week of May has many repeating the ages old mantra “Sell In May and go away.”
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