AdvisorShares Weekly Market Review – Week Ending 10/31/2014
Highlights of the Prior Week
Thursday, Floyd Norris had a post in the NY Times making the case that the bigger threat for markets and economies is not inflation but deflation. The Bank of Japan apparently read Norris’ post, were compelled and surprised markets by announcing it was taking further steps toward easing to stave off what it perceives as risk of deflation by increasing purchases of government bonds as well as equity ETFs and REITs. You’d be forgiven for missing that last bit but the Bank of Japan, in addition to buying government debt is also buy equity ETFs and REITs.
The rally on Friday in global equities was widely attributed to the BOJ news. The Nikkei 225 rallied 4.83% on Friday and 7.34% for the week after gaining 5.2% the week before. The yen took the news as the BOJ was probably hoping for by dropping 2.73% against the US dollar which is a massive move in currency trading.
Domestic equities of course also rallied last week. The Dow Jones Industrial Average was up 3.43%, the S&P 500 added 2.72%, the NASDAQ was better by 3.25% and encouragingly for the bulls, the Russell 2000 outperformed all of them going up 4.9%.
Two weeks ago we looked at the almost 8% decline that had occurred in just a few weeks as being a fast decline noting the tendency for fast declines to snap back; that slow declines have historically been the bigger threat with 2000 and 2007 both being classic examples of slow declines that have marked the start of bear markets. The idea behind this concept is that emotional rushes don’t usually mark major market turns.
Since the October 15th intraday low of 1822 the S&P 500 is up 10.75% which is an equally fast if not faster snapback rally so for the time being we could continue to see more relatively emotional trading.
As might be expected the yield on the US Ten Year Treasury Note went up in yield by a noticeable but not dramatic five basis points to 2.33%. The CBOE Volatility Index fell 13% on the week to settle in just above 14.
The action in gold was also dramatic falling 5.25% with most of the decline coming later in the week starting Wednesday when the Fed announced it was ending it asset purchase program this month as spelled out earlier this year. The end of QE lessens the threat of inflation which is bearish for gold. The continued decline in gold in dollar terms on Friday can be tied to the massive drop in the yen.
Much has also been made of the huge, almost panicked, drop in the price of West Texas Intermediate Crude which has been flirting with $80 per barrel after having been as high as $105 in late June. The implication is complicated because of course on the one hand consumers are paying less at the pump, less than $3 in many places, which some equate to a tax cut but on the other hand it is potentially an indication of weak industrial demand but of course crude oil pricing is never that simple.
The other major foreign markets all participated in the rally. The UK was up 2.15%, France up 2.46%, Germany up 3.77%, Australia added 1.94%, Shanghai was better by 5.15% and Hong Kong gained 3.01%.
Yields on European sovereign debt mostly declined last week. The German bund fell to 0.86%, the French OAT yields 1.18%, ten year paper in Spain is down to 2.09% and Italy still yields a little more than the US at 2.36%.
In the new week markets will be looking forward of course to mid-term elections and on Friday non-farm payrolls are expected to report 235,000 new jobs with the headline unemployment rate holding steady at 5.9%.
ETF News & Data
Fund flows were dominated by an exodus from several sector funds, most notably a combined $2 billion left materials sector funds from SPDR and First Trust. In the case of the First Trust fund the drop in assets was close to 75% of the fund. The SPDR S&P 500 brought in $4 billion.
There were three new funds launched last week, two actively managed, specialty equity funds from ARK Investments and a fund targeting Eurozone equities from First Trust.
IFL Science posted a fascinating story about Amelia Earhart. Evidence has been found that leads investigators to conclude she did not crash the way most people believe but that she was able to land on a deserted island and attempted to send a distress signal for five days before the tides washed the plane out to sea. You may not have known that she was not alone, she had a crew member named Fred Noonan. This raises many questions that we may get answers to like whether the lived on this island for many years or if they encountered anyone while there.
The Rolling Stone posted a scathing takedown of ESPN which it called the The Worldwide Cheerleader for what the magazine believes is a conflict of interest for the network in trying to steer the four team college football playoff toward being dominated by the SEC (Southeastern Conference, not the Securities and Exchange Commission) for financial reasons tied to ESPN’s launch in August of the SEC Network.
It may have been easier for ESPN to dismiss this entire argument if Chris Fowler had not lead an impromptu we are not biased for the SEC discussion on the Game Day show on October 25th.
AdvisorShares ETF Strategist
Source:Google Finance, Yahoo Finance, Wall Street Journal, Bloomberg, Barrons, ETF.com, XTF.com, Yahoo.com, Financial Times, Reuters, Rolling Stone, IFL Science
Weekly ETF Flows
For October 27, 2014 to October 31, 2014
S&P Sector Analysis
As for the sectors of the S&P 500, four outperformed the broad benchmark – Technology, Financials, Healthcare and Telecom. The remaining six – Industrials, Discretionary, Energy, Utilities, Staples and Materials – each underperformed. The dispersion between the top-performing and bottom-performing sectors was roughly 3.16% this week, with Technology outperforming all, and Materials coming in last.
For October 27, 2014 to October 31, 2014
As measured by the S&P 500 sector indices, respective performances were: