Going into the after-hours of Thursday’s trading session last week, we had a market that was still struggling to find direction until once again, headlines out of Europe seemed to transform equities into “risk on” mode at the snap of a finger.
We have mentioned in previous recaps of the sensitivity of the markets tied to the daily headlines, for the good and bad, that are coming out of Europe. This said, equities rallied furiously to close the week, with the SPX finishing up 2.49% just on Friday alone and just shy of technical resistance around the 1363 level.
Related to this, our market technician David Chojnacki pointed out late last week that the technical action in Technology shares forces us to take notice. Having been the market leader in terms of technical relative strength since well before the 2009 market bottom, the NDX (Nasdaq 100 Index, YTD up 14.92% versus the SPX (S&P 500) up 8.58%, and in trailing five year period up 34.78% versus the S&P 500 DOWN 10.92%), when the Tech sector bucks the trend, which in general has been down, marred with whipsaw technical action, we have to examine closely.
Apple (AAPL - News), as we have noted repeatedly throughout this year in these recaps, continues to have the heaviest weighting in the NDX, at 17.98%, and it is also the largest component in the SPX at 4.54%. So it is not only “Technology,” broadly, that has tended to lead the market higher the past several years, but the majority of the credit goes to AAPL, singularly, as the stock is up 44.20% YTD, and a mind numbing 378.52% in the trailing five year period.
With the SPX not quite touching the technical resistance area of 1363 on Friday (official close was 1362.16), we expect this level to provide some near term resistance. Obviously any equity follow through that effectively pierces this level and maintains some upward posture above it for a few days on end, would be an extremely healthy sign in terms of the viability of any lasting equity rally throughout the remainder of the summer.
Bulls that are hopeful that Friday’s rally is “only the beginning,” will point to a VIX that has recently plunged as low as a $16 handle, and consistently trading below its 50 day moving average after spending weeks if not months in 2012, above this level. Similarly, pundits will also point to the burgeoning weakness in the Longer Dated U.S. Treasury bonds, as proxy TLT (iShares Barclays 20+ Year Treasury Bond) is finally starting to see some signs of ultimately cracking.
TLT closed on Friday at $125.20 on a steep gap down, and with yields at current levels, the U.S. Treasury Bond Market has been monitored closely by many as a sign of the risk aversion tolerance of the public for the past several years, and with great success and accuracy. No doubt, a further plunge in Bond prices (and thus rising yields), would likely correspond with a continued rally in equities across the broad indexes. Additionally, the U.S. Dollar remains a valuable proxy as well, as UUP (PowerShares U.S. Dollar Index Bullish) staggered on Friday, dropping a notable 1.36% and closing at its 50 day moving average. The Euro always seems to spring to life on overnight headlines that come out of Europe, and conversely fade quickly when “negative” news permeates the airwaves.
From a pure “fund flows” standpoint last week, we are left with a bit of a mixed message, despite the positive action on the tape from Friday as well as the improving technical picture for equities. Since asset flows in ETFs are not necessarily “dynamic” to the exact minute, trading day, or even week that given buying/selling activity occurs in a singular ETF, we will likely see a clearer picture of “what recent flows are telling us” by the middle of this week. We did see heavy activity however in XLV (SPDR Healthcare), which reeled in more than $400 million in new assets during the week following the “Obamacare” decision.
XLV is dominated by large cap Pharma names including JNJ (12.27%), PFE (11.80%), and MRK (8.19%). Additionally, several fixed income ETFs were also more active than usual, including LQD (iShares Investment Grade Corporate Bond) which took in more than $250 million in assets, and BOND (Pimco Total Return) which reeled in an impressive $200 million plus, and being a newer fund to the ETF landscape, achieving this feat in a matter of a day or two in this current market environment, deserves attention. HYG (iShares High Yield Corporate Bond) also ranked among the largest inflows on the week, attracting nearly $200 million in new assets. Equity ETFs that were popular last week among buyers included IVV (iShares S&{ 500), VTI (Vanguard Total Stock Market), XLE (SPDR Energy), DEM (WisdomTree Emerging Markets Equity Income), VNQ (Vanguard REIT), and XLI (SPDR Industrials). Together, the funds collected approximately $1 billion last week.
On the redemptions side, SPY (SPDR S&P 500) and QQQ (PowerShares QQQ) led the way in losing assets, as more than $2 billion collectively left these two funds. Additionally, we witnessed selling pressure in DIA (SPDR DJ Diamonds), SPLV (PowerShares S&P 500 Low Volatility) and FXI (iShares China) as well for most of last week.
This coming trading week, although abbreviated in terms of time with Wednesday, July 4th, being a market holiday (and a much needed respite for us weary market participants and observers), will likely be pivotal in terms of determining if equities can maintain their posture at or above current technical levels. We will watch the 1363 level (previous intraday SPX high in June) closely this week, for signs if this rally has legs, or will we simply fall back down within our trading range as has occurred countless times since May.
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