Todd Sohn, CMT of Strategas, a provider of institutional macro research, has commented on the mid May markets, writing that nearly 90 per cent of days YTD have seen the S&P 500 daily trading range exceed a 1 per cent threshold.
Sohn writes that it’s a trait historically consistent with difficult equity environments (e.g. 2000, 2008), and helpful towards explaining where the bulk of investor ETF allocations are being directed.
Over the last three months, flows to Treasury products (all durations) have surged to +USD36 billion, he says, exceeding the spikes during the 2020 Covid crash (+USD25 billion), the hiking cycle induced 2018 equity bear market (+USD34 billion), and also holding the top spot in his firm’s category workbook.
“The curious mannerism of this data though is that Treasuries are currently mired in their largest intra-year drawdown over nearly 50 years of data. The iShares TLT 20+ year Treasury ETF is also trading the furthest below its 200-day moving average in history, and yet long duration flows remain persistent,” Sohn writes.
“We like to believe this is investors rebalancing their fixed income allocations, as well as those looking to bottom fish bonds. Cash-like bond products remain in high demand with short rates rising as well as acting as a safe haven from a challenging equity market. As for equity positioning, inflows continue to skew defensive… these sectors (e.g. Utilities, Healthcare) aren’t hitting aggressive territory yet, but it’s on our radar. Conversely, outflows from the Financials sector are particularly extreme, although we’re hesitant to call the space contrarian with performance on the weaker side of the ledger (that is, we’re waiting for a change of trend).”
Sohn notes that the other important highlight in their flows work is the continued lack of embrace to hedged equity products. “The U.S. Dollar index (DXY) is sitting near 20-year highs, yet allocations to hedged products remains largely lacklustre. It’s a sharp contrast to the 2014 USD bull market and we’re on guard if positioning does start to evolve.”
Sohn also comments on what he describes as ‘the washout in high growth names and their related funds…’ noting that they dominate the news.
“We’re amazed that the performance spread between ARKK and the Energy sector (XLE) hasn’t resulted in more aggressive inflows to the Energy space. Of course, time frame matters (e.g. ARKK has outperformed since inception, but not over more recent years), but we’d note that since the March 2020 equity market bottom, the ARK family of actively managed funds (eight ETFs) has taken in +USD2 billion more than the entire Energy equity ETF space (over 60 ETFs). Put in simpler terms (and highlighted in Chris Verrone’s recent work): ARKK is down -57 per cent YTD and seen over USD1.5 billion inflows, while XLE is up +51 per cent YTD yet with -USD100 million in outflows.”