Leaning into the Wind

Calm was seemingly restored last week as Greece embraced a punishing deal offered by the EU while Chinese authorities reversed the A-share meltdown with a capital infusion estimated at over $200 billion dollars and the implied threat of capital punishment for anyone daring to sell short. Against a backdrop of positive economic releases and a pullback from catastrophe overseas, a very unsubtle shift has begun within U.S. Markets as investors begin to embrace the likelihood of rate hikes coming sooner rather than later.  Everything old was new again as the sectors that seemingly benefited from a pullback in rate expectations lost ground to the old favorites like biotechnology and healthcare.  Reviewing our ETFG Quant Screeners and Fund Flows, capital is flowing in different directions and has us curious whether too many investors are leaning into one side of the trade.

Technology and biotech stocks delivered strong gains for the week while first up in the crosshairs were the REITs whose two recent weeks of outperformance were due to end if for no other reason than the REITs haven’t outperformed the S&P 500 for longer than two weeks at any time in 2015. What better reflection can we have of a bifurcated market than when rate hikes are back on the menu, REITs are out and financials are back in vogue although the action has shifted from the regional banks.  Charts comparing the relative momentum of the Financial Select Sector SPDR (XLF) to the SPDR KBW Bank Index ETF (KBE) bear a striking resemblance to those of the China A-share funds; XLF outperformed delivered nearly 5.5x the performance of KBE in 2014 and given it all up in 2015 so a few of our timing friends will say that the megabanks like Bank of America and Citigroup were overdue for a strong push.

One segment that REALLY isn’t taking the news of rising rates as soon as September all that well is the “hard asset” sphere where the Market Vectors Gold Miners ETF (GDX’s) 4.48% loss on Friday was the coup de grace of a very rough week.  Pain and suffering isn’t anything new to the gold bugs, GDX has been stuck in a shallow downtrend channel since the latter half of 2013 but last week’s nearly 8% loss pushed the fund below the lower boundary of that channel and into oversold territory on a long-term basis. According to our ETFG Quant screener, poor GDX still makes our list of 100 “worst scoring” ETFs based on behavioral factors but if we focus on just poor price momentum, GDX comes in at #33 where it’s within spitting distance of the iShares MSCI Global Gold Miners ETF (RING) and Sprott Gold Miners ETF (SGDM).  Just how bad is bad you ask?  If you reorder our lists based on just short-term or intermediate term price momentum, these funds are trading in the lowest half of the lowest one percentile in their entire history. While some investors feel there’s never a bad price for gold, $100 million in assets fled GDX last week as it’s year-to-date dipped into negative double digits….again.

Fortunately for those brave investors out there who are thinking about staking out a fund for after the great rate hike apocalypse and the potential breaking of the U.S. dollar, there are plenty of slightly less volatile ways to play that theme.  The rest of our bottom 100 ETFG behavioral funds are a grab bag of energy and natural resources funds or those countries that rely heavily on them for their economic growth.  We talked a lot about these funds and the negative exposure to the U.S. dollar they offered in our February 23rd post, “Dollar Doldrums” and from then to the end of April many delivered solid (read positive) performance until the dollar found its feet thanks to the crisis in Greece.  One of those strong performers was the First Trust Canada AlphaDEX Fund (FCAN), delivering a strong 6.2% gain before the on-going collapse in oil prices delivered a solid kick in the teeth to the energy dependent Canadian economy now teetering on the brink of recession.  With the situation in Iran threatening to add even more to the already overflowing supply of oil, FCAN has been one of the biggest losers in the sentiment race with nearly 60% of the funds’ assets leaving in July while the momentum scores hover close to record lows.  If you’re adventurous enough to take a trip north of the border, FCAN might be a less volatile way to wager on strong commodities (and a weaker dollar) than committing to the gold bug cause.

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