The sharp technical sell-off that began with worries about
Greece's solvency and yanked the Dow Jones Industrials Average down
by almost 1,000 points Thursday ended almost as quickly as it
arrived, but not before ETFs of all stripes were caught in the
Investors initially shed riskier stocks in favor of the relative
stability of securities such as U.S. Treasurys, but by the end of
the session, major stock indexes had retraced about two-thirds of
"It's basically a technical sell-off, because if you look at any
major index ETF, like QQQQ, or DIA or SPY, the 50-day moving
averages were breached yesterday, and today the selling pressure
quickly came in and we just literally gapped lower," said Paul
Weisbruch, an ETF trader with King of Prussia, Pa.-based Street One
Financial markets have been on tenterhooks since last week when
S&P downgraded Greece's sovereign debt to junk-bond status,
then followed with downgrades of Portugal and Spain. Many investors
were quietly establishing sell stops, and images of rioting in
Greece in the wake of austerity measures the government imposed
seemed to be enough to trigger the powerful wave of technical
"When every major index ETF is trading below its technical
levels, it generally generates stop-loss orders on a large scale,
and selling just kind of feeds on itself," Weisbruch added.
The world's biggest ETF, the SPDR S&P 500 (NYSEArca:SPY)
fell as much as 10 percent in afternoon trade, before recouping
much of its declines to close almost 4 percent lower at $112.94.
The PowerShares Nasdaq ETF that targets the 100 nonfinancial U.S.
companies (NYSEArca:QQQQ) fell almost 14 percent before climbing
back to settle 3.3 percent lower at $46.57 a share.
In the heat of the panic, bid/ask spreads on many ETFs that are
typically no more than a penny blew out significantly, leaving
market makers reluctant to offer panicked sellers too high a price,
lest they be caught with securities that moments later were likely
to be worth a lot less.
Specifically, Weisbruch singled out the Oil Service HOLDRS ETF
(NYSEArca:OIH), which he said had a bid/ask spread of about $2 at
the height of the selling, when volatility measurements spiked to
levels not recorded since the autumn of 2008 as the U.S. financial
crisis announced its arrival with a vengeance. He noted that OIH
usually trades with a tight 1-cent spread.
The mirror image of the flight to U.S. Treasurys was
dramatically visible with the ProShares UltraShort 20+ Year
Treasury ETF (NYSEArca:TBT), which fell more than 2.6 percent. The
security, the most widely held leveraged ETF in the world, is
designed to double returns in a falling Treasury market and, when
Treasurys rise as they did today, it magnifies losses by a factor
of two as well.
"There's a lot of macro pressure. Greece is on TV, you continue
to see a weaker euro day after day, and a stronger dollar. And
things like gold keep going higher. So there's obviously a lot of
caution on the street," Weisbruch said.
He noted the buying that quickly entered the market at the
bottom might be a positive sign-for U.S. markets, anyway. European
ETF markets saw none of the reversal that occurred in the U.S., as
Matt Hougan highlighted in his blog today.
"All those triggers are out of the market now, and someone steps
in and makes the trade of the year," Weisbruch said.
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