The beginning of last week saw some of the weakest days
since the start of the bull market only to be followed by a modest bounce off
the lows set during last falls “Taper Tantrum.”
Largely overlooked now, last October’s rally off oversold levels was
ignited by dovish comments from Fed President Charles Evans about not raising
rates before the economy had been stabilized. Not surprisingly, we’re living in the Fed’s
shadow as the back and forth between the NY Fed and the Vice-Chairman plays out
in headlines. Across every data point between now and the next FOMC meeting
could be a market turning event, but at ETFG we’re all about finding the bigger
trends so we turned to our Quant Screener to study how the last two weeks have
shifted the market dynamics.
The hands down biggest winner last week was the energy
sector where a nearly 12.5% gain by West Texas Intermediate Crude helped propel
energy stocks higher with the broad Energy Sector Select SPDR up 3.59% compared
to .91% for the S&P 500. Domestic
energy stocks weren’t the only ones to benefit from the crude recovery as
single market ETFs with heavy energy exposure enjoyed a strong week despite a
rising dollar with the small SPDR S&P Russia ETF (RBL) seeing a double
digit advance along with a 68% increase in its weekly ETFG Behavioral quant
score. Prognosticators were quick to
declare this strong advance was nothing more than short covering; after all
before last week’s rally crude oil was down nearly 60% and had dropped all the
way back to levels not seen since the dark days of 2009 with no recent change
in global production to help support the move higher. Supporting the case for short covering was
the weakness in non-energy commodities where both the IQ Global Agribusiness
Small Cap ETF (CROP) and the iShares Global Timber & Forestry ETF (WOOD)
made our list of funds that saw the biggest percentage drop in the quant scores
over the last week. Last week’s liftoff
occurred even with the U.S. dollar making strong headway as comments by
monetary policy rock star Stanley Fischer indicated that the Fed was sticking
to its “data dependent” policy on future rate hikes.
It was a different story for the utilities and REITs because
while energy stocks enjoyed strong performance on the back of rising crude
prices, a reversal in sentiment and contradictory statements from the Fed took
the wind out of the sails of the defensive favorites. Both sectors closed down for the week with
the two bell weather funds, the Utilities Sector Select SPDR (XLU) and the
iShares U.S. Real Estate Fund (IYR), losing 4.2% and 2.8% respectively. Late July had been especially generous to the
utilities as broader equity weakness helped propel the sector to the top of our
momentum lists, where it was later joined by REIT’s as their underperformance last
spring (and a stable if uninspiring economy) made their stable dividend yields
look all the more attractive. But both
of these classic defensive wagers may have committed the only unforgiveable sin
in a bear market; not only did they capture almost all of the broader market’s
downside during the rout, the public debate within the Fed over the timing of
interest rate hikes hit these two sectors the hardest and subsequently they
delivered only a fraction of the markets upside in the latter half of the week and
left them deeply in the red overall.
Further complicating the picture is their relatively high valuations and
somewhat uninspiring dividends with both XLU and IYR yielding above 3% which
while about 100 bps above the ten year Treasury pale in comparison to the 8.25%
offered by the largest MLP ETF, the Alerian MLP fund (AMLP.)
And if XLU and XLE trading places was the market
equivalent of the magnetic poles beginning to shift, just wait for the week
ahead. One fact about the rally in the
second half of last week was that it was on lighter volume than the pullback
just days before, a worrisome trend as we move into the week before Labor Day
which traditionally has been a period of even lighter volume and when coupled
with the first week of the month’s heavy economic release schedule means more
volatility is ahead. After a relatively
quiet Monday, manufacturing will take center stage on Tuesday followed by
productivity and factory orders on Wednesday before all eyes turn to Friday’s
employment report which could be the final factor many traders will consider
before the next FOMC meeting in mid-September.
No matter which way the data goes, higher volatility and more rotation
is sure to be the order of the day.
Thank you for reading ETF Global Perspectives!
Thank you for reading ETF Global Perspectives!
_________________________________________________________________
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