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August ETF Selling Into Strength

20 August 2013 at 2:46 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

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)
% Gain
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%
PowerShares (QQQ) 0.6%
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%
PowerShares (QQQ) 0.4%
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.

You can listen to the¬†ETF Expert Radio Show ‚ÄúLIVE‚ÄĚ, via podcast or on your iPod. You can follow me on Twitter¬†@ETFexpert.

Disclosure Statement: ETF Expert is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of¬†Pacific Park Financial, Inc., a RegisteredInvestment Adviser with the SEC. Gary Gordon, Pacific¬†Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any¬†investment asset mentioned above. The commentary does not constitute individualized¬†investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate¬†Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

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