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Nasdaq-100 ETF Trailing Market as Apple Results Loom

tlydon@globaltrend.com (Tom Lydon)

Recent weakness in shares of tech leviathan Apple (AAPL - News) has resulted in the Nasdaq-100 and ETFs pegged to the benchmark underperforming the broader market. Bulls are hoping Apple’s quarterly results after Tuesday’s closing bell can reverse the trend.

What should be concerning to bulls is the churning activity in the Nasdaq-100, which has been predominantly caused by the day to day action of AAPL, which currently has a 17.52% weighting in the index. AAPL had a rather rough week, closing narrowly above its 50 day moving average and touching its lowest levels since early March on several occasions.

Thus, even with a nice leg up last Friday in MSFT (+4.55% post earnings release), which is the second largest weighting in the NDX at a 9.28% weighting, the NDX failed to make any headway given AAPL’s weakness and closed barely above its 50 day moving average (official close was 2676.04 and the 50 day MA is currently 2674.56).

From a technical standpoint, we see support in the NDX between 2672-2675 as well as at 2662. On several internal notes to trading clients that we have disseminated since the beginning of April, we have pointed out the growing “overweight” to AAPL in the NDX and related ETFs such as the popular PowerShares QQQ (QQQ - News), and the simple fact that a market cap weighted index does not have the ability to “rebalance” exposure as one stock, in this case AAPL, seemingly climbs infinitely.

Now that AAPL has fallen rather sharply off of its recent highs (it traded as high as $644.00 in early April before closing at $572.98 on Friday), it is clear that selling pressure in AAPL itself has prevented the Technology heavy NDX from trending higher. We see this vulnerability as a major point of importance concerning the sustainability of a broad based equity rally heading into the summer because as we had noted during the first few months of this year in these recaps on many occasions, the relative strength leaders in the 2012 rally have been largely Technology and Financials.

Year to date, both sectors are still out-performing the S&P 500, as SPDR Financials (XLF - News) has rallied 16.76% versus the S&P 500’s 9.92% return, while the Nasdaq 100 is up 17.64%. Speaking of Financials, XLF also flirted with its 50 day moving average on several occasions last week but found some support, and Friday’s weakness was largely due to a sell-off in BAC which was down 4.68% on a downgrade by an influential Street analyst, and is a 5.4% weighting in the S&P Financials index that XLF tracks.

From a fund flows standpoint, it does seem that there is some concern out there regarding the tech heavy Nasdaq, as QQQ led all ETFs in outflows via redemption activity, and lost about $1 billion in assets for the week. The small-cap iShares Russell 2000 (IWM - News) followed, losing about $800 million in assets, and this could be a sign of institutional investors selling out of “higher beta” areas of the equity market and embracing a potentially more defensive posture. The iShares MSCI EAFE (EFA - News) and SPDR S&P 500 (SPY - News) also saw net outflows, losing $600 million and approximately $550 million collectively last week.

The past week was characterized by a batch of mixed earnings reports and overall, narrow trading ranges for the major indices. The SPX, as our market technician David Chojnacki pointed out late last week in a client note, has been trading “in Limbo” which is defined as the range between 1370 and 1388. Below 1370 he sees potential selling pressure that could take the index down to 1340, but above 1388 there is upside bias.

Not surprisingly, the SPX has clung rather tightly to its 50 day moving average during this narrow trading range over the past several weeks as well. On the whole, ETF/Index options activity have expressed caution for several weeks now, but the volumes are not earth shattering, and mostly appear to be institutional portfolio managers hedging positions via puts in products such as IWM, SPY, and EEM for instance, and not outright bearish speculation.

Fund inflows were much lighter in absolute terms compared to outflows, as the leader in creations, SPDR Basic Materials (XLB - News) , only took in about $450 million in new assets. XLB is heavy names including DD (11.25% of the index), MON (9.74%), FCX (8.23%), PX (7.81%), and NEM (5.79%). DIA was also near the top of the list in terms of creation activity, taking in more than $400 million in new assets, as was Vanguard S&P 500 (VOO - News) which continues to see impressive inflows in recent weeks (+$370 million via creations).

Some other sector specific funds also saw notable inflows, including SPDR Energy (XLE - News) and SPDR Industrials (XLI - News), collectively accumulating nearly $500 million in new assets.

Outside of equities, a number of fixed income related ETFs were also very active last week on the creation front. The iShares High Yield Corporate Bond (HYG - News), SPDR Barclays Capital Aggregate Bond (LAG - News), Vanguard Total Bond Market (BND - News), SPDR Barclays Capital High Yield Bond (JNK - News) and iShares Investment Grade Corporate Bond (LQD - News) all ranked among the top 10 in the ETF landscape in terms of net creation activity, and collectively hauled in about $1.1 billion in assets.

Going into the final trading days of April and with the major indices well off of their late March/early April highs, we will watch technical levels closely this week to see if we can gauge any indication of whether the 2012 rally can continue going into the summer, or if we will have a rude surprise like 2011’s swift and sudden late summer correction.

For more information on Street One ETF research and ETF trade execution/liquidity services, contact pweisbruch@streetonefinancial.com.