Tuesday, February 16, 2016

Is it the End of the Affair?

The mood in the markets at the start of last week could easily be summarized by a few lines from Ghostbusters:  “Fire and brimstone coming down from the skies…Rivers and seas boiling…Forty years of darkness…Earthquakes, volcanoes…dogs and cats living together!”  But a simple tweet late on Thursday  that OPEC might finally be ready to collude (which is its function after all) to limit oil production plus some bond buying by Deutsche Bank turned sentiment around and sparked a 4% rally for the Financials Sector Select SPDR (XLF) which left the fund just outside bear market territory.  And while many were willing to write it off as a dead cat bounce since none of the underlying issues facing global banks have really changed, internationals markets screamed higher on Monday while everyone’s favorite “defensive” holding, gold, took it on the chin leaving many wondering if Friday’s action was the beginning of a new trend.  It seems almost guaranteed that the U.S. equities will continue the party when we reopen but we turned to our list of Quant Movers on the fate of those funds containing two diametrically opposed investments, bank stocks and gold miners, to find out which might prove to be a short-lived affair.

Bank stocks had all the right pieces in place leading up to Friday’s face-ripper; first, there was the brutal start to the year with the iShares U.S. Financial Services ETF (IYG) and the PowerShares KBW Bank Portfolio (KBWB) both down over 20% as of last Thursday.  Contrarian investors would tell you that sentiment couldn’t have gotten much worse as concern over DB’s CoCo Bonds and Janet Yellen’s speculation on negative interest rates have investors wondering if the latest crisis was more reminiscent of 2008 or 1932?  But while the doom and gloom might have extended all the way from Zero Hedge to more mainstream media, a number of funds saw their ETFG Behavioral Scores bottom out at the beginning of the week as a shift in their momentum scores coincided with an improvement in their performance relative to the broader market.  If financial funds only appeared on our daily list of biggest movers, we’d be more inclined to look at this as a “one and done” affair but our weekly list is dominated by financial funds including IYG, the SPDR S&P Bank ETF (KBE) and even broader funds like the iShares Russell Mid-Cap Value ETF (IWS) which has a nearly 30% weighting towards financial stocks although nearly half of that exposure is in REIT names.

Contributing close to 15% of the S&P 500’s market cap, any rally by bank stocks is going to be welcomed by the bulls who’ve been relying on the value sectors like energy, utilities and consumer staples to keep the broader market afloat. Despite their making up only 20% of the market, what has us curious is the possible longevity of this rally if it fails to spillover to smaller banks.

A quick glance at our heatmap will show you that while nearly every bank outperformed the broader market on Friday, there was a clear relationship between their market capitalization and the one day return with behemoths like Bank of America and Citigroup up over 7% compared to 5% for regional firms like M&T Bank while even smaller institutions and numerous savings and loans lagged at less than 3%.  It’s not surprising that larger banks have reaped more of the benefits because after all, they’ve suffered more than regional banks have in 2016 with IYG and KBE down 20.7% and 21.6% respectively before Friday’s rally compared to a 16.3% loss for the more micro-capped focused First Trust NASDAQ ABA Community Bank Index Fund (QABA.)  Plus those megabanks are more likely to have the resources to survive if the event rates go to zero or worse, go negative, but that lack of spillover to smaller institutions is at least troubling given their focus on loan creation.  Another item that gives us pause is that despite having 116 holdings, a significant factor in getting IYG onto our list of top movers is that Bank of America, Citigroup and J.P. Morgan make up close to 24% of the funds allocation with 58% in the top ten names overall!

The surge in bank stocks may have helped lift the market while taking a predictable toll on some of the “safe-haven” plays like utilities and long-term Treasuries but even that powerful rally couldn’t dent investor enthusiasm for the gold miners as a late-afternoon surge by the Market Vectors Gold Miners Fund (GDX) helped the fund close up 2.56% on the day and up over 10.5% for the week!  Even after five straight years of losses, it’s almost hard to imagine how far has GDX come since the start of its rally on January 20th, going from oversold to overbought territory while gaining over 51% in the process!  This week brought a major development that might warm even a gold bug’s heart as GDX was outpaced for the first time since the start of the rally by its rivals that focus on smaller-cap names including the Market Vectors Junior Gold Miners ETF (GDXJ) and the Global X Gold Explorers Fund (GLDX) while high volatility and momentum have propelled GLDX and the Global X Silver Miners ETF (SIL) to higher rankings on the ETFG Top 100 Behavioral List at #45 and #57 respectively.  But the fact that GDX continues to have trouble making the top 50 has us wondering if the miner rally is about the pause.

The technicians in the audience would tell you that being overbought on a short-term (and almost on an intermediate-term) basis is a signal that the first phase in a rally might be coming to an end, especially as GDX enters the range between $18-$23 that is littered with numerous moving averages and prior resistance/support levels that could slow down any further momentum.  More troubling for us is that GDX’s behavioral score continues to fall despite the strong price gains and has wondering if we might be in for a replay of mid-2014 when GDX enjoyed a six week rally off concerns on the Fed’s tapering program only to see interest in the miners “taper” off into the summer as more promises from the Fed soothed investor anxiety and if there’s one weapon left in the Fed’s arsenal, it’s making promises.  So while investors might say they love enough for both the miners and bank stocks, they’re going to have to choose to which they are willing to commit.

Thank you for reading ETF Global Perspectives!

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