ETFs Stunk In Q2 But They're Ripe For A Turnaround

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Many ETF investors are glad to see June and the second quarter in the rearview mirror.

ETFs tracking stocks, bonds, commodities and currencies all went on a wild ride, especially after Federal Reserve Chairman Ben Bernanke said the Fed could take the economy off life support later this year and end quantitative easing by mid-2014.

Since then some Fed members have tried to calm the markets, saying that the country may need prolonged treatment. Regardless, investing strategists see the stock market rallying as much as 12% from June's close.

Returns Of Major ETFs In June And Q2

SPDR S&P 500 ( SPY ), the world's largest ETF by assets: -1.85% and +2.39%.

SPDR Gold Trust ( GLD ): -11.03% and -22.87%.

Vanguard FTSE Emerging Market ( VWO ): -6.61% and -9.56%.

iShares MSCI EAFE Index ( EFA ), tracking developed foreign markets: -4.61% and -2.85%.

PowerShares QQQ ( QQQ ), tracking the 100 largest nonfinancial stocks on the Nasdaq: -2.7% and +3.33%.

Vanguard Total Bond Market (BND): -1.84% and -3.3%.

Is Ben Really That Big?

The SPY corrected 7.9% from the May 22 peak to the June 24 bottom. The headlines largely blamed Bernanke for the sell-off. But could he just be a summer sell-off scapegoat?

The stock market is seasonally weakest from May to October, according to The Stock Traders Almanac. Its study of the Dow industrial average from 1950 to 2011 found that the index lost an average of 1.2% in the May-to-October period while returning an average of 9.3% between November and April.

A $10,000 investment between those years would have turned into $6,723 if someone invested only during the May-October period. By contrast, if an investor only invested during the November-to-April period, that $10K would have ballooned to $1.9 million.

The market was due for a normal dip after rising 18% for the year at its May peak without even a modest 5% pullback along the way. Since its October 2011 trough, the SPY has staged only two notable corrections, losing about 10% each.

Birinyi Associates counts 17 pullbacks of 5% or more since the bull market began in March 2009. The dips averaged 8.3% and took 25 days to rebound.

"It is not fun and it hurts to see the market drop 5% in days, but markets which don't turn lower on bad news or dislocation are overheated and dangerous," Birinyi said in a client note issued June 26.

A handful of indicators show the market was oversold and investor sentiment has turned very bearish, suggesting the SPY bottomed June 24, according to Mark Arbeter, chief technical strategist at S&P Capital IQ.

"The NYSE advancing volume minus declining volume fell to an extreme oversold condition on June 20, which was quickly followed by a sprint to an extreme overbought condition on June 25. The large flip in this indicator has many times been a sign that the market was bottoming," Arbeter wrote in his weekly technical report Friday.

The latest NAAIM Survey of Manager Sentiment survey of active money managers showed the most bearish reading since May last year.

"The May survey from 2012 corresponded very closely with the pullback lows from that period," Arbeter wrote.

He projects the S&P 500 will reach 1800 by year's end. That translates to roughly 180 for SPY, up 12% from Friday's close.

S&P Sales And Earnings Growth

The S&P companies as a whole reported flat sales in the first quarter. Analysts on average see 1.8% growth for the second quarter, according to Thomson Reuters. So far 97 companies have lowered earnings estimates for Q2, while 15 have raised guidance.

Sales may be weak, but earnings per share have risen to new highs thanks to companies buying back shares. In turn, profits are distributed among fewer shares. S&P companies have spent a total of $702 billion on buybacks and dividends over the four quarters ended in March, according to Yardeni Research.

Earnings growth should support share prices, Ed Yardeni, president of Yardeni Research wrote in his briefing Friday. 2013 forward earnings, forecast by companies and analysts, rose to a record high of $117.09 a share, up 3.6% over last year, as of June 20. Analysts project earnings of $123.65 for 2014.

Business spending has been rising along with forward earnings. And consumers, who account for more than two-thirds of the second, are the most confident since January 2008. Yardeni expects the S&P 500 to trade sideways this summer and end the year between 1665 and 1700, which translates to 166.50 to 170 for SPY.

June And Q2 ETF Flows

Investors yanked nearly $10 billion, or 1% of assets, from equity ETFs in June. They put in $7.7 billion, or 0.7% of assets, during the second quarter, according to Lipper Inc.

Bond ETFs bled $9.7 billon, or $4.6% of assets, in June. They added $2.46 billion, about 1% of assets, in second quarter.

ETFs investing in European stocks enjoyed the greatest inflow over the same periods. They attracted $1.4 billion, or 10% of assets, in June and a total of $1.7 billion, or 8% of assets, in Q2.

Emerging market ETFs experienced the highest degree of outflow in June and second quarter. They shed $6.3 billion, or nearly 10% of assets, in June and $10.3 billion, or 9.6% of assets, for Q2. Emerging market bond ETFs spilled $1.5 billion, or nearly 16% of assets, in June. Their outflow totaled $1.4 billion, or 12% of assets, in Q2.

The rate of emerging market debt redemption is the greatest since the 2008 bear market, Bank of America Merrill Lynch strategists wrote in a report released June 27. Heavy outflow has marked a turnaround for emerging markets in the past, which leads them to believe the likelihood of a bounce is high.

Follow Trang Ho on Twitter@TrangHoETFs.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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