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?

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