Monday, October 19, 2015

Everything All the Time

It was another positive week for global equities but with nearly half of the S&P 500’s gains for the week coming in the last two hours of trading on the Friday, the mood among traders might be best summarized by a quote in Friday’s Financial Times from Divyang Shah of IFR Markets when he said that “What we have had is a risk rally, built on the relief that things have not deteriorated as fast as had been priced.”  And while the relief at improvements in Thursday’s Initial Jobless Claims and CPI reports was almost palpable sparking a strong 1.49% advance on the day, our list of the biggest movers and shakers at ETFG would seem to indicate that investors continue to search for direction in the post-Fed markets.  With more earnings reports and another FOMC meeting in two weeks, we continue to sift through our tables of score changers looking for clues on how investors are positioning their portfolios and are starting to find that indecision at the Fed is spilling over to investor portfolios with two distinct trends emerging depending on the news flow.

Our first evidence that investors might be of two minds on how to prepare their portfolios came from our list of funds that saw the biggest improvement in their weekly behavioral score where a pattern of country rotation seems to be taking shape.  Chinese stocks rallied last week on hopes that the increasingly negative economic news could be foreshadowing new government stimulus programs and at least one China fund made our list, the KraneShares CSI New China ETF (KFYP) but investors seem to be taking a breather after the fast and furious EM rally over the last few weeks.  Our list of top gainers has a distinctly European flavor including the WisdomTree International Hedged Quality Dividend Growth Fund (IHDG) and the iShares MSCI Netherlands ETF (EWN) seeing strong jumps in their behavioral scores while Brazilian funds dominate those experiencing the biggest weekly losses.  But where investor seem to be of two minds is when you change the time period from weekly to daily where the strong advance by the S&P 500 on Thursday and Friday led to a strong increase in investor interest in U.S. oriented funds over a wide variety of different sectors.

With data points supporting those who insist the Fed is behind the rate hike curve, strong action by the financials wasn’t overly surprising and while we’ve talked about the potential impact on smaller banks, two sector funds offering large cap exposure made our list for most improved behavioral score.  Weak trading revenue maybe the primary culprit behind the lackluster earnings reports this quarter, but Thursdays stronger-than-expected core CPI headline sparked a major one-day move among some of the largest banking names like Citigroup (up 4.44%), Bank of America (3.52%) and Goldman Sachs (3.06%) which helped lift the iShares Dow Jones U.S. Financials ETF (IYF) 2.03% that day and raise its behavioral score by 70% in just one day.  Joining the fun was the iShares U.S. Insurance ETF (IAK) fund whose behavioral score recorded a 55% gain on Friday thanks in no small part to strong performance by two names, AIG and Travelers, that make up nearly 19% of IAK’s portfolio.  Both funds offer concentrated exposure with significant allocations to their top ten holdings; IAK’s portfolio has more than 60% tied up in its ten largest positions and which might explain why another iShares sector fund, this time the iShares Dow Jones U.S. Healthcare ETF (IYH), also made our short list on Friday thanks to strong performance by Pfizer and Johnson & Johnson.

But we have what might be an even better example of investors trying to go in two directions at the same time thanks to two Vanguard Funds. Looking again at our list of top score changes for the week, the Vanguard Consumer Discretionary ETF (VCR) had a strong showing with a 23.06% gain and we can’t help but wonder how much of that was attributable to investors fleeing from the fallout from Wal-Mart’s weak earnings report at the start of the week which sent its stock plummeting nearly 10% in one day and dashed the hopes of investors who sought lower volatility in the consumer staples sector.   But even a 5.4% allocation to Wal-Mart wasn’t enough to scare investors of the Vanguard Consumer Staples Fund (VDC) with a strong 1.02% gain that pushed the fund back into the black for the week, keeping the fund within spitting distance of recent highs, and which saw the funds ETFG behavioral score surge more than 64% in just one day!  And while surging behavioral scores are always nice to have, each of the funds we’ve discussed today will see at least one component with an earnings report coming out this week including major announcements from Chubb (5% of IAK) after the close on Tuesday followed by Coca-Cola (8% of VDC) on Wednesday, investors should be prepared for more turbulence to shake up and the best laid plans of cautious investors.

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