Throughout the bulk of 2013, investors became accustomed to seeing U.S. stock market benchmarks close near their intra-day highs. In August, however, we may be witnessing the birth of a disconcerting pattern whereby institutional investors sell broad-based equities into strength.
Consider the trading activity on seven of the most popular ETFs on Tuesday, 8/20:
|On Tuesday, 8/20/2013, at 3:30 p.m. (EST)|
|iShares Russell 2000 (IWM)||1.5%|
|Vanguard Extended Market (VXF)||1.4%|
|iShares Russell 1000 (IWB)||0.8%|
|iShares S&P 500 (IVV)||0.8%|
|iShares S&P 100 (OEF)||0.5%|
|SPDR Dow Jones Industrials (DIA)||0.3%|
|Selling into the Closing Bell at 4:00 p.m. (EST)|
|iShares Russell 2000 (IWM)||1.4%|
|Vanguard Extended Market (VXF)||1.3%|
|iShares Russell 1000 (IWB)||0.6%|
|iShares S&P 500 (IVV)||0.6%|
|iShares S&P 100 (OEF)||0.2%|
|SPDR Dow Jones Industrials (DIA)||0.0%|
Tuesday’s gains did snap a 4-day losing streak for the S&P 500. Yet the Dow Industrials logged a 5th consecutive loss, and that came after trading in positive territory for the majority of the session. Moreover, money flow data at WSJ.com show that adviser-based investors dumped roughly $150 million of iShares S&P 500 ( IVV) on heavier than normal 3-month volume; similarly, Vanguard loyalists bid farewell to $78 million of Vanguard Extended Market (VXF) on 7x the typical volume over the last 3 months.
Granted, it is way too much of a stretch to suggest that a near-term downtrends is inevitable. On the other hand, what are the compelling reasons to be a “net buyer” of U.S. stock assets at this moment? Stocks are fairly valued or extremely overvalued, depending upon the analysis.¬†Treasury yields are rising faster than the Fed can contain them. And, in spite of the noise, there’s little evidence of a “great rotation” from bonds into stocks.
You may believe (as I do) that the 10-year Treasury yield and corresponding lending rates will come back down to the 2.25%-2.5% range. Nevertheless, many have already succumbed to a notion that rates will keep climbing. Consumers and businesses simply will not spend as freely if they expect rates to continue on an upward trajectory; down go corporate profits; down go sales and expectations for better times ahead.
It follows that the uncertainty in August (and perhaps September) may be too much to bear. Profit-taking and capital preservation instincts may kick in, though stock sellers may not choose to rotate back into bonds. Call it, the “Great Cash Pile-Up.”
The guidance that I am providing here is to make sure that you have a bit of cash on the sidelines as well. In my estimation, there is a likelihood that the Fed may not even get the cover it needs in a “strong” employment report, and that any slowing of bond purchases by the Fed will be miniscule. In essence, an August-September swoon should provide ample opportunity to buy defensive stock ETFs with less sensitivity to interest rate movement.
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