My ETF scans this week are turning up some interesting money rotation. The short funds have been the obvious leaders over the last six weeks, but we are seeing money move towards dividend type assets. REITs, dividend ETFs, preferred stock ETFs, emerging market bonds, utilities and hybrid high yield bond ETFs. The interest in dividends is being driven by the low yields on cash as investors shift money to avoid risk. Are they really avoiding risk is the bigger question, or just reshaping the risk they are taking? As an investor we have to define the risk of our portfolio overall and by positions. If you want to own higher dividend paying assets measure the risk before you buy. Paying a dividend doesn’t make the asset safer, but it does buffer the volatility.
The inverse ETFs have been leading the list over the last four weeks and they are now rotating to the bottom of the scan results. This shows money exiting these funds currently and rotating to the dividend type funds. The declining interest in the inverse funds is a positive for the June 4th low or potential pivot point. The rally off the 1266 low has pushed back to resistance at the 1330 level. What is the catalyst for this shift in sentiment for the buyers? The answer will give insight to strength of the bounce. The initial driver is the stimulus talks from the central banks. If they follow through on the rumored liquidity the rally will push higher on perception and speculation it will help the global economies. The rallies tend to fade short term, but they are worth trading on the short term event. Plenty of speculation to go around, but this event is shaping up as a trading opportunity near term.
The chart below of the S&P 500 index shows a reverse head & shoulder pattern developing. If the index break above 1330 resistance with conviction a move to the 1367 level and then 1400 could be the follow through move. This is all speculation at this point, but the catalyst of stimulus may be enough to drive the index higher. Investors want to believe this will all end well, and they seem willing to bet on the central banks and stimulus for now. The move could result in a trading opportunity. Something would have to develop in order to move the index higher than the 1400 level, and be more substantial than printing money.
The stimulus story has worked in the past to rally the markets, but each time it happens it provides less of an impact based on the results of the previous stimulus not creating a lasting effect. If the central banks take another step to provide a boost to growth, the impact isn’t likely to be sustainable again. The debt issues facing Europe and other nations aren’t going to be fixed by throwing money at the problem. Fixing a debt problem by creating more debt isn’t exactly intelligent. Thus, take what the market gives. Treat it as a trading opportunity and nothing more. Until the upside can validate a sustainable reason to move higher take it one day at a time, and use your stops to protect your downside risk.