Strong Stomachs Required

Global equity markets started the new year with their own fireworks show although the overall effect felt like less “bang” and more “KABOOM” as the S&P 500 recorded its worst opening week as credit markets begin to move away from the zero bound.  Most eyes were locked on the debacle in Shanghai and even as Chinese stocks closed the day in positive territory, U.S. equities opened in the green only to close deeply in the red and close to the lows of the day as renewed stability in China wasn’t enough to avert profit taking here at home.  With over $2.5 billion yanked from the SPDR S&P 500 ETF last week, it’s not surprising that our ETFG Quant Movers List has a distinctly defensive flavor but even amid the profit taking on Friday a small trend emerged that could signal that 2016 won’t be so cut and dried.

The first four trading days of the year had a distinct “baby and the bathwater” vibe going as investors rushed to clear their portfolios of anything that was positive in 2015 and run back to their old defensive favorites like the gold miners and utility funds.  The permabears and gold bugs are probably still doing a victory lap after the strong outperformance by a number of gold funds last week including the Market Vectors Gold Miners Fund (GDX) which was up 5.83% while SPY languished with a 5.86% loss.  And while that certainly wasn’t the biggest point spread the two funds have ever recorded, it seemed to lend credence to the notion that the miners have returned to their old role as a place of “safety” when the broader equity market is suffering and to the steady accumulation gold mining funds have seen since the first bout of equity turbulence last summer.

Bigger (in terms of average market capitalization) was definitely better at least performance wise, but a number of investors were clearly trying to get ahead of a trend by going small with the microcap Global X Gold Explorers Fund (GLDX) seeing it’s behavioral score rise over 43% last week on strong price momentum.  Utility funds have benefited from the same trend although not to the same degree as investors have been hesitant to overly commit to an already richly priced and interest rate sensitive sector.  The Vanguard Utilities VIPERS Fund (VPU) had the strongest increase in its weekly behavioral score with an almost 44% gain although ranking our coverage universe based just on momentum would pretty much just show every utility fund we currently track.

Friday might have been scary from the technicians’ point-of-view as equity indices were unable to hold their gains and closed near their lows, tensions cooled enough to allow a handful of individual names to outperform on the day and keep it from being a slam dunk for defensive equities.  GDX lost over 2.4% on the day as December’s strong Employment Report signaled that the Fed could potentially be on track to raise rates again in early spring which would raise the opportunity cost of holding the miners.  Utility funds also suffered minor losses on the day as their recent outperformance against the broader equity markets has reached almost extreme levels and has investors seeking out more attractive price-to-yield opportunities elsewhere, most noticeably among MLP funds that were hard hit by profit taking earlier in the week.  MLP funds had a strong run-up in late December and a good chunk of those gains were given back in the first four days this week but a number of funds recovered some lost ground on Friday including the JP Morgan Alerian MLP ETN (AMJ) with a 1.17% gain.  In fact, if you used the Quant Report to re-rank our coverage universe based on short or intermediate term momentum, AMJ would make the list of top 50 funds based on its recent price action while even broader energy sector funds like the SPDR Select Sector Energy SPDR (XLE) makes the top 100 as its price performance becomes “less bad” relative to the broader markets.

For those who can look beyond the doom and gloom and with the S&P 500 just crossing into oversold territory, there’s always the possibility that any calm overseas could help spark at least a short-term rally here at home and what could lead the way higher then?  You could use the ETFG Quant Report to find funds with high implied volatility and low but improving momentum (which would mostly get you more MLP funds) or you can use the Grey Market report to back into funds offering high exposure to names that could see the most bound from a “world’s not ending today” rally.  A handful of stocks found strength on Friday including Apple (AAPL) after dominating much of the headlines earlier in the week when the stock broke below $100 on heavy distribution.  Leaving issues of iPhone sales aside, a technician would tell you that distribution has pushed the stock into deeply oversold territory and given its size and popularity, could make it a candidate for a near term bounce.  Our Grey Market report identified the iShares Technology ETF (IYW) as having the single largest percentage allocation to AAPL in our coverage universe at 16.5% and it definitely shows in the funds behavioral rankings.  Even with a healthy dose of the FANGs, IYW’s short and intermediate term technical scores rank in the lowest decile while short interest and implied volatility remain relatively high.  With the fund approaching the levels where it found support last August and for those with strong stomachs, it might be worth putting the fund on your watchlist if equities begin to find support over the next few weeks.

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.