After stepping back and digesting the past week in the equity markets, it’s easy to fall into the frame of mind thinking about “The Week That Wasn’t.”
Apple (AAPL) announced extremely disappointing earnings last Tuesday after the closing bell, and the near term future looked dire not only for Apple’s stock but for the markets in general.
AAPL carryies a 17.98% weighting in the Nasdaq 100 and a lofty 4.54% weighting in the S&P 500 Index (not to mention being the No. 1 component in the SPX by a meaningful margin, #2 weighting is XOM at 3.12%).
SPX futures traded as low as 1321 (regular session lows in the entire month of July were never below 1325) during the overnight session going into Wednesday of last week but stabilized all day Wednesday, and strengthened immensely throughout the week with the SPX ultimately closing at an impressive 1385.97 last Friday (and trading as high as 1389.19).
These are levels in the SPX that have not been touched since prior to the sweeping May 2012 sell-off (remember that?). This said, anyone whom thought they were “lucky” in selling into the small bounce off of the overnight lows post-AAPL earnings on Wednesday, likely spent the weekend crying in their beer after watching the frantic action from last Thursday and Friday in the markets. In fact, we wonder if AAPL had been added as a component of the Dow Jones Industrial Average (which has been a popular notion in the press for at least the past year), with it’s massive $500-$600 handle, would the “market” really have been “up” last week given the fact that AAPL stock falling back $40 to trade as low as $570. The simple mathematics and methodology of the Dow Jones Industrial Average being a “price weighted” index tell us “no.”
We have mentioned throughout 2012 in these recaps the importance of the Technology sector (and particularly AAPL stock with its lofty 17.98% weighting in the NDX) in terms of its relative strength to the broad based markets referenced by the SPX (AAPL +44.47% YTD, NDX +16.19%, SPX +10.59%), and even with AAPL staggering last week post-earnings, to see the broad markets rally to new recent highs is a fantastically encouraging sign for bulls as well as those on the sidelines waiting to move back into the equity markets.
So what saved the equity markets last week if it wasn’t mighty AAPL stock, which closed the week down more than 4%? Once again, it appeared to be the “Not So Invisible Hand” of central banks as European headlines once more carried substantially more weight here in the United States than actual events and company driven developments (such as AAPL’s earnings). Fans of classical economics and Adam Smith will recall the references in his writings to the “Invisible Hand” of governments and central banks and their roles in influencing the economies and securities markets of the world. Lately in today’s equity and fixed income markets, one seemingly can scrap fundamental and security specific analysis and simply become as granular as guessing on how the next coordinated, or singular central bank move or headline will influence stocks and bonds direction wise, and run portfolios accordingly. Is this an easy task? Absolutely not, as short sellers on Friday at a level of previous technical resistance in the SPX (1375) will tell you (SPX closed as we mentioned above 1385 to end the week).
After briefly trading as high as $21.00 following AAPL’s earnings report, the VIX quickly plunged, closing Friday once again with a relatively low $16 handle (those who vividly recall this time in the markets last summer, the VIX was around these levels and on its way to as high as $48.00 by last August). Themes from the options markets that we have been monitoring include put buying in broad based products such as SPY, IWM (iShares Russell 2000) and EEM (iShares MSCI Emerging Markets) for instance, despite the recent run up in equity prices across the board.
Call buyers have been present however in some cases, but specifically in areas including Gold, via GLD (SPDR Gold) and IAU (iShares Gold), as well as in Gold Miners via GDX (Market Vectors Gold Miners) calls to be more specific. If we examine net fund flows from last week, a gigantic $7 billion was yanked collectively from broad based, popular ETFs including SPY (SPDR S&P 500), QQQ (PowerShares Nasdaq 100) and IWM for example, and the leading ETFs in terms of inflows (and we note that in terms of dollar inflows, none of these funds took in more than $200 million last week) across the landscape of all ETFs were a dividend/quality equity based product, DVY (iShares DJ Dividend Select), a high yield corporate bond product, JNK (SPDR High Yield Bond), BOND (PIMCO Total Return), XLP (SPDR Consumer Staples), and TLT (iShares 20+ Year Treasury Bond). These ETFs have a few things common even to the casual observer, and that is they are all relatively conservative “yield” plays as opposed to “beta”, nor much less “high beta” plays.
This tells us that on the whole, market participants and investors were not at all prepared for this sudden European salvation headline driven rally, and loads of cash are freshly on the sidelines and ready to react to whatever this coming week may bring us.
As we close out July and head into August, which was such a nasty month last year to most institutional portfolio managers and the clients that they serve in terms of overall 2011 performance, we find it hard to believe given the fact that “the news is on the tape” and there is a massive amount of cash on the sidelines that will need to position itself somewhere to close out the remaining quarters of 2012, that the market will revisit last year’s lows. But then again, as we saw last week after Apple’s (and the market’s) brief flirtation with disaster, anything can happen.
For more information on Street One ETF research and ETF trade execution/liquidity services, contact email@example.com.