ETF Expert

Stocks haven’t quite “gone away” in May. In fact, the S&P 500 at 1346 remains within spitting distance of its multi-year peak of 1370.

In spite of remarkable stock resilience, the 10-year treasury bond yield has dropped to a jaw-droppingly low 3.14%. That has helped Bond ETFs hit 52-week highs for the fourth consecutive week. (Remember, it wasn’t that long ago that perceived economic strength had been pushing 10-year yields toward 4.0%.)

One might be tempted to attribute bond gains and the corresponding ultra-low yields to the Fed’s QE2 program. However, Bond ETFs aren’t hitting 52-week highs on Bernanke’s back alone. Many may recall that PIMCO is abandoning U.S. debt in the largest bond mutual fund, PIMCO Total Return. Moreover, the debt rating agency Moody’s fired an “outlook downgrade” across the bond bow. And April fund flow data pointed to bond fund outflow.

It follows that the most likely reason for Bond ETF gains is that the institutional money smells fear. Here is a list of popular Stock ETFs and Bond ETFs that hit fresh 52-week highs on Monday, May 9:

Utilities and health care stocks collectively comprise the ingredients for the stock soup du jour. More specifically, the money that has been pouring into defensive stock ETFs is supporting an overall market that appears vulnerable.

For instance, would Dr. Copper, the metal with a Ph.D. in Economics, really fall below its 200-day long-term average in a self-sustaining recovery? Would home price declines really be accelerating? Would the ISM Non-Manufacturing Index be at its lowest level in 9 months?

In summation, we’re seeing 52-week highs from high income producers (e.g, PGX, HYG,), low-yielding corporate credit bond ETFs (e.g., CFT, CIU) and defensive stocks (e.g., IHF, PSCU). The trend is not a big time endorsement of risk; rather, the trend seems more indicative of a holding pattern.

A noteworthy exception? Aerospace and Defense (ITA) has found a groove. James Paulsen, chief investment strategist at Wells Capital Management, attributes the success of industrials like Boeing and United Technologies to a “manufacturing renaissance.” Indeed, it’s hard to deny that the weak dollar has benefited U.S. manufacturers… maybe even at the expense of non-manufacturers and consumer purchasing power.

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