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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 “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFexpert.

Disclosure Statement: ETF Expert is a web log (”blog”) 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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