Monday, August 24, 2015

Green Shoots

Volatility has replaced the iPhone as China’s chief export as second devastating week saw the venerable Dow Jones Industrial Average and the NASDAQ tip into technical corrections while the S&P 500 is now off 7.5% since peaking on July 20th.  The relative calm at the start of the week was shattered first by Wednesday’s early release of the FOMC minutes followed by Thursday’s release of the Caixin PMI report that showed Chinese manufacturing continued to contract for a six straight month.  The outcome was that the S&P 500 closed at the lows on both Thursday and Friday, losing 5.2% in two days and now more than 100 points below the 200 day moving average and also erasing most of the gains since last October’s pullback.  There were a few pockets of green to be found on ETFG’s heat map, so this week we turn back to the ETFG Scanner to find opportunities for the more adventurous investor.

While only a handful of utility stocks closed in positive territory, it shouldn’t come as a surprise that the behavioral scores for the Utilities sector continue to climb as investors seek safety in this classic defensive play.  Nearly all the domestic utility funds currently tracked by ETFG, appear somewhere in the top 50 of ETFG technical scores and measure relative momentum on either a short or intermediate term basis.  Investors continue to show their love towards two of the biggest funds, despite their negative performance for the week, with the Utilities Select Sector SPDR Fund taking in $125 million in new assets last week while their smaller competitor, the iShares U.S. Utilities ETF (IDU), had to be content with a mere $22 million.  For those who are curious as to why neither fund appears in our Behavioral Top 25 List, the problem has to do with the nature of utilities funds that typically have much lower implied volatility than other sectors although one fund does make the grade.  As the name implies, the PowerShares DWA Utilities Momentum Portfolio (PUI) is a momentum based strategy of at least 30 names built around the Dorsey Wright Utilities technical leader’s index and carries a much higher ETFG Risk Rating in part due to its higher volatility.  One little fund that did manage positive performance last week was the Deutsche X-trackers Regulated Utilities ETF (UTLT) thanks largely to the 16% of its allocation in Greater Europe where both the Euro and Pound outperformed the dollar last week.

But if you were really looking for green last week, you had to focus on gold where many of the mining stocks delivered positive (for a change) double digit performance.  Gold and its more volatile and publicly traded cousin, the gold miners, have seemingly returned to the role of a defensive equity play that they occupied for nearly twenty years during the great bull market that began in 1982.  While the miners saw a tremendous erosion of value throughout that period, they would find temporary favor by delivering positive performance during the intermittent pullbacks only to surrender those gains as soon as the bull market resumed.  That historically negative correlation between the gold miners and the rest of the equity market, seems to be back in force; since closing at a low of $103.93 on August 5th, the SPDR Gold Trust Shares Fund (GLD) has gained 6.9% while the Market Vectors Gold Miners Fund (GDX) is up nearly 17.57% in the same period compared to a 6.1% loss for the S&P 500.  Both funds have seen strong buying in the last thirty minutes of each trade day, indicating that the smart money might be behind much of the recent accumulation with GLD seeing $278 million in new assets in the last two weeks compared to $28 million in GDX whose recent performance and skyrocketing behavioral scores still hasn’t taken the sting out of the 76% drop the fund endured since September of 2011.

Not everything that glittered last week was gold and the volatility of the gold miners almost pales in comparison to that of two of the Quantshares Market Neutral funds that saw their ETFG behavioral scores skyrocket thanks to last week’s market pandemonium.  The QuantShares U.S. Market Neutral Anti-Beta Fund (BTAL) and the QuantShares U.S. Market Neutral Momentum Fund (MOM) both recorded strong gains last week (3.95% and 2.25% respectively) as their unique long/short strategies helped them outshine their more popular competitors in the alpha-seeking and low volatility spheres.  Both funds focus on spread returns with BTAL’s strategy built around a long portfolio of low beta stocks and a short portfolio of high beta with a substantial gap between the two according to their last quarterly fact sheet with the long portfolio at .78 and the short portfolio at 1.3.  MOM has a similar strategy focusing on momentum stocks although the difference in beta between the long and short portfolios was less substantial and decidedly offered less power during last week’s rout.  Before investors rush out to give ALL their money to the two funds, consider their Red Diamond Risk scores which are remarkably high given their lack of leverage.  MOM and BTAL both have deviation scores in excess of GDX’s while their small asset size and low daily trade volumes give them elevated liquidity scores.

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