Monday, June 29, 2015

Ticking Down to Opening

We were asked recently about identifying what behavioral finance specialists would call “investor herding” but instead of recommending books or articles, we would suggest investors stay glued to their screens over the next few days.  During the time it took to write this post, Greece has declared a bank holiday and put capital controls in place following the failure in negotiations last week between Greece and Troika officials that, in very different circumstances, would resemble a Mel Brooks film. With the futures indicating markets will open deeply in the red, investors will have a front row seat to what happens when everyone positions themselves the same way and then runs for the exits at the same time.  The financial media will spend hours debating the surprise decision by Prime Minister Alexis Tsipras to call a referendum on a bailout proposal that has already been pulled from considerations, but we here at ETFG are ready to consider what happens next and lets start by looking at how investors have been positioning themselves over the last two weeks.

It doesn’t seem that long ago that investors were confident that Greece and the Troika would resolve their issues (actually it was last week) but while the procedures to ring fence Greece’s banks are still being debated, investors have spent much of the last two weeks protecting their portfolios on a number of fronts.  The first step came by taking profits wherever they could, most noticeable in the China A-share market where in just the last two weeks the largest A-share fund, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR), has seen a stunning 22% drop.  In the meantime, European-oriented funds have continued to pull in assets but there’s been a noticeable shift in momentum towards countries perceived as safe havens with the two funds we discussed on June 15th, the iShares MSCI Spain (EWP) and Germany (EWG) funds, completely dropping off our list of the top 100 funds ranked on momentum and other behavioral factors.  In fact, while Germany remains well-represented on the list in both hedged and unhedged formats, the only other country-specific fund with Euro exposure in the top 50 is the iShares MSCI Netherlands ETF (EWN) which has seen investor interest skyrocket over the last two weeks while Europe’s other problem children are quickly sent out of the room.  The year’s strongest single market performers, Ireland (EIRL) which is up 18.4% in 2015 and Italy (EWI), up 18% have seen a major loss of investor confidence with EWI completely dropping off our lists while EIRL is hanging on at #91.

Here in the U.S. investors have been dealing with the possibility of a Grexit and years of uncertainty over the fate of the EU in a slightly different way.  Our coping mechanism is to wholeheartedly embrace the concept “in times of crisis, go with what you know” which means absolutely hammering interest-rate sensitive sectors with both the Utilities Select Sector SPDR (XLU) and iShares DJ Real Estate ETF (IYR) making new lows for 2015 after declining more than 2.3% last week.  But at least they had good company as investors hog piled onto their former darling the iShares Barclays 20+ Treasury Bond Fund (TLT) which lost a staggering 3.2% and made the gold bugs feel at least somewhat better as both GLD and GDX pulled back to retest their 2015 lows.  In fact, if we were to rank the lowest scoring funds on a behavioral basis, GDX and a host of other natural resources funds would make the cut at #75 thanks largely to some of the lowest momentum scores the fund has recorded since we developed our system.  But being despised and overlooked can have its virtues, especially if and when investors decide that the Fed rate hikes are baked in to expectations or god forbid, the Fed chooses to hold off in September.

And since imitation is the sincerest form of flattery, we’re feeling truly special today as the best performing sectors on the week were regional bank stocks with the SPDR S&P Regional Banking ETF up 2.35% for the week and taking its two week total since we last mentioned the fund in our “First Past the Post” article to 3.42% versus a .41% gain for the S&P 500 while the tiny fund with a smaller-cap focus, the First Trust NASDAQ ABA Community Bank Fund (QABA) was up 5.56% for those two weeks.  In fact, since we wrote about QABA in our March 7th post “Bank Stocks for the Win”, the little fund is up a whopping 14.05% compared to 11.5% for KBE and 1.4% for the S&P 500.  And while it is nice to be occasionally spot on, our diligent readers might recall that the focus of “First Past the Post” was that while the odds favored the bank stocks, that likely strong performance was going to unfavorably shift the payoff potential and since then, the technical situation continues to dim and especially for QABA which crossed the overbought threshold at 70 this week.

But the real question we have to wonder about is how the markets will open?  It’s easy to go with the trend when the assumption is that the Troika will act to save Greece and domestic investors at least have strongly positioned their portfolio’s assuming good times are ahead while traditional “safe havens” like Treasuries, utilities and gold took it on the chin.  What will happen when that’s proved untrue?

Thank you for reading ETF Global Perspectives!

Monday, June 22, 2015

Rising Risk Aversion

While Thursday’s weak CPI report gave hope that inflation might stay too low for the Fed to realistically raise rates, much of the week’s equity rally had more to do with four weeks of steadily receding momentum than with the hope that rate hikes might be postponed into 2016 - even the more dovish Fed couldn’t stand in the way of what was either profit-taking or portfolio de-risking.

Domestic investors continue to debate the Fed and global investors have been focusing their attention on the developments in one of the world’s smallest and one of the largest markets; Greece and China making it easier to show the increasing aversion to risk that seems to be taking hold of the market.

It should come as no surprise to our readers that we’re starting our global review in China where the A-share market saw its single largest weekly drop since 2008 with the Shanghai Exchange dropping nearly 13.3% for the week with Friday gap opening down before shedding 6.4% on the day.  Chinese equities have been a regular topic of ours, most recently on March 16th where we pondered whether the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) was due to cool off after the fund saw a clear loss of momentum in the first quarter after 2014’s blistering 53% advance.  Instead we learned a valuable lesson in top calling as ASHR rocketed up another 50% from March 16th to June 12th as investor demand for higher rates of return met with increasing liquidity provided by the PBoC via another rate cut in May.  ASHR has been through more than its fair share of profit taking cycles in the last year with the fund going from overbought to nearly oversold in a little as a week, but while it’s been said many times before, this time it might be different.  Not just because the PBoC has made the massive increase in investor margin a point of concern or the recent that Morgan Stanley study that showed most investors feel the market is a bubble but because those investors are actually doing something about it.  Even as investor short-interest remains high, there has been a clear loss of momentum for China A-share funds as ASHR has seen over $300 million in assets leave the fund in the last two weeks, a nearly 19% drop!

But while investors are warming up to reality in China, a somewhat different situation reigns in Europe as the flood of capital from brave and intrepid investors who have put capital to work in European stocks despite the slow motion disaster in Greece has slowed to a trickle. Hundreds of articles have been written about the amount of capital that has found its way to funds like the WisdomTree Europe Hedged Equity Fund (HEDJ) which pulled in $13.5 billion in the first five months of the year or the Deutsche X-trackers MSCI EAFE Hedged Equity (DBEF) with a more modest $9.9 billion take, but few have been published talking about the dramatic slowdown in new flows with only $144 and $464 million heading into the two funds respectively over the last two weeks.  And while it’s reasonable to assume that thanks to the dollar’s weakness the capital has been heading to unhedged or country-specific positions, that certainly isn’t the case with the iShares MSCI EMU Index (EZU) pulling in less than a half of a percent in assets in the last two weeks.  Even tiny GREK’s $11 million take in the last two weeks (some of which is for shorting) is a fraction of the $218 million the fund has seen flowing in since the start of the year.  Investors are clearly moving into a wait-and-see mode while they await the latest arguments from the Troika.

Closer to home, if there’s one segment of the market where prognosticators feel a return to reality is most needed it’s the biotech sector where a 5.19% gain for the week by the SPDR S&P Biotech ETF (XBI) took the 2015 return to 35.78% and helped keep the fund in the top 5 behavioral scoring funds.  The catalyst for the nay-sayers is the recent IPO of Axovant Sciences (AXON) who’s priced popped 99% at its debut on June 11th, giving the small company an initial valuation of $2 billion dollars, although the stock has since dropped over 35% helping shed nearly $600 million from the market cap.  And while the market is right to be concerned over the fury of interest for a small-company that’s only been in existence for nine months without a revenue generating product (it’s going to Phase III trials), what has us interested is that despite the sky-high valuations, investor enthusiasm for the sector seems to be boundless.  XBI is currently leader of the biotech pack based on our ETFG behavioral factors and while the fund only has a quarter of the assets of the iShares NASDAQ Biotechnology ETF (IBB), the fund’s focus on small biotech stocks has kept its short interest near record highs even as IBB’s continues to fade.  One factor keeping it high is that XBI’s average market cap is slight more than $2 billion compared to $20 billion for IBB as investors continue to short shares in the hope that reality sinks in sooner rather than later.

Thank you for reading ETF Global Perspectives!

Monday, June 15, 2015

Taking the Pulse & Healthcare

All eyes turn to the Fed this week as the FOMC gathers in Washington to decide whether the time has come to raise the Federal funds rate, something that hasn’t been seen in America in nearly eight years.  And while September remains the odds on favorite for the first rate hike, it was only a few weeks ago that money managers like Jeff Gundlach were speculating that there wouldn’t be a rate hike at all in 2015. However given the recent spate of positive economic news over the last two weeks, investor confidence has been shaken as concerns that the FOMCs day of financial reckoning might soon be upon us and so we at ETF Global decided it was time to check-in on our list of funds ranked by their behavioral scores to see how those anxious investors have been positioning their portfolios.

It should come as no surprise that international funds continue to dominate the list of top funds with 16 of the top 25 offering exposure to Europe, China or another emerging market.  What is surprising (or not if you’re being cynical) is that two funds that have absolutely dominated the asset flows in 2015, the WisdomTree Europe Hedged Equity (HEDJ) and the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF) are far down the list with HEDJ coming in at #60 while DBEF clocks in at #255 thanks to shifting momentum that has brought unhedged currency exposure back in style.  UUP has shed nearly 4.9% since April 13th and dragged HEDJ and DBEF along for the ride with those funds down 6.92% and 3.56% respectively while every nation specific fund that iShares could whip together has been delivering solid mid-single digit returns except two, iShares MSCI Germany ETF (EWG) which is down 4.42% since April 13th and iShares MSCI Spain Capped ETF (EWP) which is up a mere .14% for the same period.  Besides lackluster performance both funds also share top billing on our behavioral quant list, coming in at #3 and #7, far ahead of better performing iShares MSCI Ireland (EIRL), which only ranks at #15 despite a strong 4.99% advance.  Could both funds be enjoying a late momentum push as investors hope the laggards finally catch up?

Our more regular readers might have noticed there’s one sector that’s conspicuously absent from our list of top ranked funds, healthcare, were the lack of any broad sector or even large sub-category funds makes the presence of several of this year’s high-flying biotech funds even more apparent.  The first non-biotech fund to make the list is the tiny RBS Global Big Pharma ETN (DRGS) at #29 while the sector heavyweight Health Care Select Sector SPDR Fund (XLV) doesn’t make an appearance until #58, behind the better trending banking and insurance ETF’s, small-cap agribusiness and even that must have for all well-balanced portfolio’s, the iShares MSCI Denmark (EDEN) fund.  The momentum downshifting since we last wrote about XLV at the start of the month has been remarkable; in terms of pure price momentum the fund now lags significantly below XLF and only high long-term momentum scores and short interest keep XLV at the top of the select sector pack.  Even more remarkable has been the shift in fund flows; on June 1st we wrote that XLV had pulled in more money in the first five months of the year than in all of 2014 but some of our faithful readers have been heading our words as the capital flows have started going the other way.  During the last two weeks while XLV has struggled to get above $75, approximately $60 million has left the fund in search of greener pastures.

With XLV ending Friday with what our chart watching friends might call a bearish “evening star” pattern, we’re left wondering how long before the rest of the capital finds a new home, but the more assertive investors aren’t waiting for the other shoe to drop and have been busily putting their assets to work in in a new entrant, the iShares U.S. Financial Services ETF (IYG), as the small fund heavy weighting towards its top ten holdings like J.P. Morgan and Goldman Sachs has helped it outperform the S&P 500 by over 400 bps in the last three months.  And while IYG might be feeling lonely in the top 25, several other funds have been climbing the list with two small offerings from Powershares in the 40’s, the PowerShares KBW Capital Markets Portfolio (KBWC) at #41 which like IYG has a focus on larger bank stocks while the PowerShares KBW Regional Bank Portfolio (KBWR) at #47 is similar to the funds we discussed last week with a focus on those smaller banks that stand to the benefit the most from rising net interest margins.  Price momentum has pulled these two funds far up the list, but for our more active traders using the ETFG Quant reports looking for momentum and simply screening on strong price action (and more than $10 million in assets) would land on the little First Trust NASDAQ ABA Community Bank Index Fund (QABA) who’s sizzling 2.7% performance last week left the rest of the financial pack in the dust.  Only a miniscule short interest ratio keeps the fund from making the top 50 and with performance like that, it’s probably only a matter of time before it does.

Thank you for reading ETF Global Perspectives!

Monday, June 8, 2015

First Past the Post

All eyes may have been on American Pharaoh this weekend but despite his major accomplishment, he was wasn’t the only winner last week. The release of last Friday’s Jobs report that saw strong private employment growth and rising weekly earnings helped shift the odds that rate hikes will be coming sooner rather than later and investors were quick to adjust their wagers with interest rate dependent REIT’s and utilities both making new lows for 2015. And while investors were quick to pile into their favorite trades like long dollar, the real winner was a sector we’ve talked about before, regional bank stocks, which have been riding a wave of investor enthusiasm to new highs over the last four weeks.  Positioning yourself for a rising rate cycle might make sense but investing largely comes down to putting your capital to work when the odds are in your favor and we’re wondering what the potential payoff might be for sticking with the heavy favorite.

Regional bank stocks have become the odds-on favorite after they enjoyed a tremendous week thanks to investors who looked to a strong Jobs report for confirmation that pressure on net interest margins might soon be eased. While Bank of America enjoyed a strong 2.44% advance on Friday, the action was more mixed for funds with a focus on the large and mega-cap financial institutions with the iShares U.S. Financials ETF (IYF) up a mere .38% on Friday thanks to a large allocation to laggards like Berkshire Hathaway and other insurance stocks while more mega-cap oriented iShares U.S. Financial Services ETF (IYG) notched up a 1.2% gain on the day.  But the real winners on Friday were those who heeded our March 9th blog posting, “Banking for the Win” because the smaller the average market cap, the better the performance with the S&P SPDR Regional Banking ETF (KRE) enjoying the strongest advance on the day with a 1.89% gain although less enterprising investors chose to make a $2 bet on the PowerShares KBW Bank Portfolio (KBWB), up over 1.8% on Friday and whose average market cap of $39 billion is nearly 6X greater than that of KRE ($6.6 billion.) But before you rush out to join the trend and buy into funds with a microcap focus, consider whether all the investors who came before you have skewed the odds.

Remember that the biggest payoffs always come when the odds are long and investors who ventured into the long-over looked banking sector on March 9th were well rewarded for their bravery with KRE up over 7.8% and KWBW up 6.8% compared to 2.69% for the Financial Sector Select SPDR (XLF) and slightly over 1% for the S&P 500.  And while everyone likes a winner, one of the key ingredients of our ETFG Quant Screening system is fundamental valuations and regional bank stock funds like KBWB, KRE and the SPDR S&P Bank ETF (KBE) made our short-list for funds with the one-day biggest percentage drop in their fundamental scores.  KBWB and KBE both saw their overall fundamental scores drop by more than 20% on the day as investor excitement over the financial relief from expanding NIM ratio’s pushed the price of both funds close to a historic peak on one valuation metric or another.  Both funds are trading at or near their highest recorded price-to-cash flow metric ever recorded while KBE’s trailing P/E ratio is trading in its highest 5th percentile since the fund’s inception (although at 15.34 it still ranks below the broader market with SPY currently at 18.45.) Expanding margins are always good for business, but the real question that has yet to be answered is whether the regional banks will see loan growth expanding at a rate faster than their cost of funds as rising rates are a two way street.

But at ETFG we recognize that relying solely on valuation metrics is somewhat like trying to win a horse race by having the lightest jockey; it can’t hurt but it won’t really be the deciding factor in whether you reach the winners circle.  So switching over to the technical picture for the sector, a quick glance at the charts shows that KBE, KBWB and KRE all find themselves in a very similar technical setup, which is not surprising for KBE and KRE which despite their different benchmarks have a fair amount of cross-holdings between the two funds.  After blistering advances in 2013 that saw all three funds up more than 40%, a Fed induced malaise set in for 2014 as investors pondered the end of QE3 and had many in the media speculating whether the end had come from bank stocks. Hindsight is 20/20 because in retrospect, the regional bank ETF’s now appear to have needed time to digest their strong gains.  All three ran into strong overhead resistance in the first quarter of 2014 as their 14 week relative strength index’s traded well above the overbought level of 70 and needed time to cool off before retesting those levels again close to year-end.  And thanks to the strong growth in employment, all three funds have seen strong buying activity over the last five weeks that’s finally pushed our three funds above that prior resistance and on to new highs.  But with all three RSI scores now closing in on 70, we have to wonder if the easy money has already been made.

Momentum is one of the market anomalies known to persist for extended periods and more fortunes have been lost by short sellers declaring “it can’t keep going up from these levels” than ever were ruined by a long weekend in Vegas but remember the keys to long-term alpha depend on timing and wagering when the odds are in your favor.  Important things to remember before adding long exposure to the Bank of the Ozarks in your portfolio.

Thank you for reading ETF Global Perspectives!

Monday, June 1, 2015

May Meditations

The old proverb of “In like a Lion, Out like a Lamb” almost perfectly sums up the market action for the month of May where the S&P 500 started with a strong 1.08% gain and then made a new high on the 20th before investor sentiment turned negative leading to a retreat where Friday’s closing level of 2,107.39 was just below that of May 1st.

While investors told themselves that at least U.S. equities outperformed the horror show of the emerging markets like Brazil, South Africa and Russia, the on-going breakdown of the Dow Jones Transportation Average and with the venerable DJ Industrial Average just holding it’s 200 day moving average has some wondering if it isn’t time to “sell in May and go away.”  With our May now in the history books, we’ve decided it’s time to check-in on monthly fund flows to find out if investors are doing just that or whether there might be hope for the bulls after all.

Looking back at May, the biggest winners of 2015 continued to pull in new assets as investors sought refuge from their Fed-induced anxiety.  While European investors are beginning to brace for the very real possibility of a Greek exit from the EU, the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF) continued to dominate in 2015 by adding another $785 million in new assets to take its three month total to over $7.76 billion and while Vanguard FTSE Europe’s (VGK) $813 million take helps it close the gap with DBEF, with “only” $2 billion in new assets in those same three months, it still has a long way to go before catching up.  And while those brave souls who venture into the China A-share market find themselves being tossed around by the shifting tides of liquidity over the last few days, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) saw a monthly inflow of new capital equal to 12.5% of its assets.

Back here in the U.S., the shape of things to come continues to be determined by when investors think the Fed will beginning raising rates and has bond investors taking different tacks.  Two bond funds suffered substantial outflows as the release of the April FOMC meeting minutes revealed the members still believe that the economic weakness will be transitory with the worst pain falling on the iShares 20+ Year Treasury Bond ETF (TLT) that saw a nearly 18% outflow as some investors continue to heed the Fed’s warnings.  Others with a more short-term bent are speculating that rates won’t be rising till the fall  leading to a nearly 30% drop in assets at the iShares Short Treasury Bond ETF (SHV) fund as investors reduced their immediate need for duration protection.  The outlook for domestic equities remains murky; few sector-specific funds made our short list and nearly all of the SPDR select sector funds recorded outflows for the month.

If there’s one segment of the market that has yet to feel the pinch, it’s the high-flying healthcare industry, where M&A fueled speculation has helped keep investor expectations (and returns) high. The Healthcare Select Sector SPDR (XLV) is up 9.9% YTD compared to a more modest 3.18% for SPY but even that strong return for a broad sector fund puts XLV near the bottom of the pack for healthcare funds thanks to the strong performance of biotech names.  Larger biotech funds like the iShares Nasdaq Biotechnology ETF (IBB) and the SPDR S&P Biotech ETF (XBI) continue to deliver sizzling year-to-date returns of 20.33% and 27.87% respectively and even then they still lag newer (and smaller) BioShares Biotechnology Clinical Trials (BBC) with a 29.06% return in 2015 that puts the fund in the top decile of healthcare funds according to Morningstar.  And while we’d like to take some of the credit for the success since featuring BBC in our “New-to-Market” segment, the credit goes to names like Synageva Biopharma (up 129% in 2015) and bluebird Bio (up 111.79%) but with buyout fever spreading to large-cap names like Humana (now up 49.69%) and Pittsburgh’s own Mylan (28.85%), investor demand for healthcare would be understandable.

But after digging into the numbers, we were surprised to see that even the healthcare sector isn’t completely immune to increasingly cautious behavior by investors as inflows to the hottest segments of the sector have dried up to a trickle.  IBB and XBI might continue to dominate the assets in the biotech sector, both funds have seen slight outflows in May (1.26% and 1.9% of AUM respectively) but even as investors are taking profits in biotech, they continue to pour new funds into broad based healthcare funds, with XLV taking in another $589 million in May to bring the YTD total to $1.342 billion.  Putting that into perspective, the fund “only” took in $1.4 billion for all of 2014!  What might give investors pause is that some of that share creation is for increased shorting where XLV ranks behind only XLK for highest relative short interest while buyers have simultaneously pushed prices to the point where XLV has the second highest p/e ratio of all the sector ETF’s trailing only XLE.  While XLV might be hanging in there for now, how much further can it separate from the market?

Thank you for reading ETF Global Perspectives!