As we extend our deepest sympathies, the twists and turns
of the equity markets might seem almost callous amidst the scenes of carnage
and almost unimaginable horror that overtook Paris this weekend. The more
bullish market watchers will point to that violence as one cause for further
volatility which seems almost guaranteed.
It seems that the seeds of last week’s sell-off were planted long before
terrorists set out to destroy the eternal city of lights. No one fund can serve as a sort of market
“canary in the coalmine” but we can begin to detect a pattern and combining a
few data points has us wondering whether a major shift in the markets’ dynamic
has taken place.
Last week’s action could best be summed up by the Market
Vectors Retail ETF (RTH), a highly concentrated portfolio of some of America’s
largest names that saw a nearly 70% increase in its ETFG Fundamental score (remember,
a rising fundamental score means the fund’s price is falling) as those biggest
names like Amazon, Apple, and Nike that make up the bulk of the most-common equity
indices felt the worst of the pain. We
don’t often talk about the ETFG Fundamental score, partly because valuations
are a better predictor of “Long-term” value, but some will say that the pain
inflicted on mega-caps stocks was long overdue.
From the trough on September 29th to the peak on November 3rd,
size definitely mattered with titans like Amazon and Microsoft up 25% and
pulling large-cap funds including the SPDR S&P 500 ETF (SPY) or the iShares
S&P 100 ETF (OEF) up double digits (12.2% and 13.3% respectively) while
their small-cap brethren such as the iShares Russell 2000 Index (ETF)
languished with a 9.3% return. Those
double digit moves helped pull large-cap stock prices right back to the old
highs and dragged their valuations into nosebleed territory, but while last
week’s pullback might be simple profit taking to some, a major larger shift was
going on behind the scenes.
Profit taking is, after all, a normal behavior
following a strong run-up, however in the case for something more
widespread is the Guggenheim S&P 500 Equal Weight ETF (RSP) whose 3.77%
loss last week exceeded its market cap weighted brother SPY despite having a
fraction of the exposure to Amazon and Apple.
For the more visually inclined we suggest looking at the ETFG heat map for last
week’s performance by the S&P 500 which would show a few pockets of green with
only the utilities sector on the whole managing to end the week in positive
territory and demonstrating just how widespread the selling pressure has
actually been. Nearly every sector from
healthcare plans through retail had a number of companies with high single
digit losses with the exception of the financial sector where nearly every bank
was down 3%-4%. In fact, in the eight
days since the recent market peak, SPY has shed nearly 4.11% which is only
slightly worse than the 3.62% loss that small-cap focused IWM has experienced. Small wonder then that the percentage of
companies trading above their 50 or 200 day moving averages continues to fall
after reattaining heights not seen since the fall of 2014. After peaking at over 80%
on November 2nd, slightly more than 50% of S&P 500 components
are now trading above their 50 day moving average while fewer than 40% are
above their 200 day.
So small-cap stocks lagged on the way up and have
suffered almost equally on the way down, a sure sign of a top-heavy rally if
there ever was one and if there’s no safety to be had even in mega-caps, is it time
to batten down the hatches and swap stocks for bonds to ride out the storm? No investor likes to see their gains fade but
before pushing the sell button, we’d ask you to consider that while that 3.5%
loss eroded nearly all the gains of the prior four weeks, the situation remains
far from desperate. The S&P 500
sitting just 20 points above the 2000 level has acted as a key support zone
recently while other indicators followed by the more-technically inclined would
suggest that the market is hovering well outside of overbought levels. The real action will be parsing Fed speak as
three voting FOMC members will be giving speeches this week while the minutes
of their last meeting will be released on Wednesday. With last week’s disappointing
retail sales and Producer Price Index report, the focus will be on searching
out any hints that FOMC members are having second thoughts about raising rates
or that any rate hike might be a “one and done.” Market safety might be difficult to come by
in the week ahead.
Thank you for reading ETF Global Perspectives!
_______________________________________________________________
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