Stocks and other riskier assets have are now into a second day
of selling off, prompting debate as to whether this is merely a
healthy correction before the resumption of the previous rally or
the start of a prolonged slump.
Some market participants might be inclined to say that two
days of market action does not provide enough information to
decisively say the recently established uptrend is now
threatened. Others argue that there ample causes for concern,
such as slack economic data and the sequestration debate.
Time will tell which school of thought will be vindicated, but
in the meantime, some
could be spinning tales that are not likely to please the bulls.
Consider the following scenarios.
Turning The Lights On Investors are once again embracing
utilities stocks and ETFs as the broader market falters. That
much is understandable as the Utilities Select Sector SPDR (NYSE:
) has a one-year correlation of just 0.11 to the SPDR S&P 500
according to State Street data
Indeed, XLU and related fare have been less bad compared to
higher beta sectors over the past two days, but further momentum
toward utilities equities and ETFs could easily be viewed as a
sign risk appetite is diminishing.
There is a cautionary tale investors must acknowledge. In June
reported XLU was richly valued
and trading with a P/E ratio that was high on a historical basis.
That article ran on June 18 when XLU's P/E ratio was 15.4. The
ETF is barely cheaper today with a P/E ratio of 15.04, implying
investors will be paying up for a sector that offers little in
the way of growth.
Junk Bond Outflows Often used as a barometer for gauging
investors' willingness to embrace risk, junk bond ETFs have been
seeing outflows. While this scenario
has previously been overstated
and immediately followed by inflows and higher share prices, it
is worth noting high-yield bond ETFs have recently seen
On Tuesday, $137 million was pulled from high-yield bond
funds, almost two-thirds of which was attributable to ETFs,
according to Highyieldbond.com
. Assuming net outflows are the case again this week, that will
mark the fourth consecutive week of cash being pulled from junk
bond funds, the web site reported.
Crude Crumbling After making several attempts to make through
resistance in the $97 per barrel area, West Texas Intermediate
futures are now spotted below $92.80 per barrel. Oil is one of
the ultimate risk assets and further retrenchment here could
easily drag equities lower.
If the lower highs on the WTI chart are not convincing enough,
try the fact that the PowerShares DB Crude Oil Double Short ETF
) is up 10 percent in the past five sessions. Today, DTO is
higher by 3.7 percent on volume that is better than 50% above the
Wilting Emerging Markets As was noted on Wednesday,
China, South Korea, Brazil and Taiwan have been
hampering diversified emerging markets ETFs this year
. India and Russia have not been anything to write home about,
Combine those six countries and there is roughly 68 percent of
the country weight in the iShares MSCI Emerging Markets Index
). EEM is suffering, but that has been good news for the Direxion
Daily Emerging Markets 3X Bear Shares (NYSE:
). In a sign of the times, EDZ is up 4.3 percent today on volume
that is more than 57 percent above the daily average.
For more on ETFs, click
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advice. All rights reserved.
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