Take the Money and Run

In 2014, investors would have greeted the news of easy monetary policy by the Fed by heaping praise on the venerable institution and sending equities to a new high.  Truly we’re living in a brave new world when instead of shouts of praise and thanksgiving, the FOMC announcement and it’s increasingly dovish dot plot were met by confusion over the Fed’s new global outlook.  Markets responded to the increasing uncertainty of Janet Yellen’s Fed by following the old mantra, “when in doubt, get your money out” and sending the S&P 500 down nearly 2% in the two days after the announcement.  While most market quarterbacks had predicted the Fed wouldn’t hike on Thursday, hardly anyone predicted the market’s response to the Fed’s dovishness.  Our ETFG Quant Report shows more than a few traders had already positioned themselves in the weeks before the announcement for more uncertainty at the highest levels by reversing course on two different asset classes most likely to benefit (or not) from the new regime.

No one benefited more from the possibility of higher rates than those bank stocks we first discussed last March as they looked forward more to a return to a normal interest rate policy after years of tightening their belts and getting by on razor thin net interest margins.  During the spring, the Financial Sector Select SPDR (XLF) and Vanguard Financials Index Fund (VFH) saw strong momentum than helped push up their overall quant scores while the big winners were those regional bank ETFs like the SPDR S&P Regional Banking ETF (KRE) whose average market capitalization of just $2.7 billion (compared to XLF’s $40 billion) reflected its exposure to those smaller banks likely to get the biggest boost from a rate hike.  None of these three funds made our list of biggest quant losers last week because the wind has been slipping from their sails since early August when investors first began to suspect a rate hike might not be forthcoming and the fallout has been extreme.  Measured simply on price momentum (our technical score component), XLF is the worst performing select sector fund and would make a list of 100 worst performing funds, with XFH and KRE close behind.  What keeps them off a list based on our total behavioral scoring process is their relatively high put/call and implied volatility, where VFH would be the lowest ranking fund with a behavioral score of 29.7 thanks to its much lower average market cap than XLF.  However the fund outperformed its larger rival last week thanks to a large REIT allocation, over 20% of its portfolio, that helped it outperformed XLF by over 100 bps.

And while REIT’s managed a to keep Friday’s loss to a negligible .35%, Friday’s big winners were gold mining stocks that ate up the increasingly dovish dot plot as a gift from heaven with the Market Vectors Gold Miners fund adding on another 1.54% on Friday to take its weekly gain to 9.5%.  While the more dovish dot plot is sure to make the front page of every gold bug newsletter, the strong reversal by the gold miners has been anything but sudden.  The miners have been a regular topic here at ETFG where as recently as July 20^th, after having been stuck in a downtrend channel for over two years, they finally broke below the lower boundary to all new lows and leaving many of the gold mining funds to occupy the bottom rungs of our behavioral reports.  Like the bank stocks however, GDX doesn’t appear on our list of top weekly movers as the fund has been steadily gaining momentum since the global volatility picked up shortly after our article.  GDX made strong gains against the broader equity market in the first two weeks of August before slowly giving up the ground it won back over the rest of August and early September as the market mayhem in China began to subside.  Despite that, GDX’s overall quant score continued to steadily improve and the fund now ranks as #11 although that high position has more to do with the fundamental and quality scores rather than pure momentum.  Even last week’s stunning reversal is just a drop in the bucket compared to that prior history that once saw GDX become one of the largest ETFs.

While the post-Fed sell-off may feel a lot like “the last shall be first,”  at least some small part of that shifting dynamic is explained by the lack of any major news releases on Friday to provide direction to the market which the coming week might help correct.  Leading up to Friday’s GDP print, we have the preliminary Chinese PMI report on Tuesday in addition to Durable Goods and Chicago Fed activity index on Thursday.  The real excitement will be a speech by Chairwoman Yellen on Thursday afternoon where she’s sure to be put under a microscope about the recent meetings.  With the president of the SF Fed already talking about the “close decision” and saying a 2015 rate hike is still appropriate, volatility will be the order for another week.

Thank you for reading ETF Global Perspectives!

______________________________________________________________

Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice.  ETF Global LLC (“ETFG”) and its affiliates and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively ETFG Parties) do not guarantee the accuracy, completeness, adequacy or timeliness of any information, including ratings and rankings and are not responsible for errors and omissions or for the results obtained from the use of such information and ETFG Parties shall have no liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of such information. ETFG PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.  In no event shall ETFG Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the information contained in this document even if advised of the possibility of such damages.

ETFG ratings and rankings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. ETFG ratings and rankings should not be relied on when making any investment or other business decision.  ETFG’s opinions and analyses do not address the suitability of any security.  ETFG does not act as a fiduciary or an investment advisor.  While ETFG has obtained information from sources they believe to be reliable, ETFG does not perform an audit or undertake any duty of due diligence or independent verification of any information it receives.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor.