Monday, August 31, 2015

Polar Opposites

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!

_________________________________________________________________
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

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.