By now you have heard about the market dislocation that occurred on Monday. After closing 530 points lower on Friday, futures on the Dow Jones Industrial Average were suggesting the Dow would open hundreds of points lower on Monday. Indeed, that is what happened, and then it proceeded to plunge to a 1,089-point loss, about six minutes into the session. From there, it rallied nearly 1,000 points higher before turning south again to finish the day off 588 points.
It was a topsy-turvy day for the Dow, but that is not the index I want to talk about. Instead, I’m going to focus on the S&P 500 because there are three ETFs that try to mimic its performance. The S&P 500 traveled a similar path to the Dow. In percentage terms, the S&P 500 was off 5.3% at its low and down 3.9% for the day.
The three ETFs designed to track the S&P 500 are the SPDR S&P 500 (SPY), iShares Core S&P 500 (IVV), and Vanguard S&P 500 (VOO). All three hold the same 500 stocks in the same identical proportions. These 500 stocks happen to be among the most liquid stocks on the planet, so in theory, there should be no concerns about the liquidity of the underlying stocks.
ETFs are required to publish their intraday-NAV (“iNAV”) every 15 seconds throughout the trading day. This is where we see the first discrepancy. VOO’s iNAV was down 5.2% at its morning low and came closest to matching the -5.3% low in the S&P 500. Meanwhile, the iNAV’s for SPY and IVV both registered 8.1% drops (2.8% worse than the index). However, investors cannot buy or sell ETFs at the iNAV, so the actual price performance is more important.
For the entire day, all three ETFs did slightly worse than the 3.9% drop in the index. Both SPY and VOO finished 4.1% lower, while IVV declined 4.2%. The intraday action is another story. At the low point of the day, the Vanguard S&P 500 (VOO), which is probably the least liquid of the three, held up the best by holding its decline to 7.2%. The SPDR S&P 500 (SPY) is far-and-away the most liquid ETF available, but it was down 7.7% at its nadir. However, this looks downright excellent when compared to the iShares Core S&P 500 (IVV), which was posting a 26.0% decline at the same moment in time.
Monday was a mini version of the 2010 Flash Crash. In many instances, ETF market makers pulled their bids and stepped away. IVV was trading more than 19% below its intraday fair value (or -26.0% on the day), and it was far from being the worse. The Guggenheim S&P 500 Equal Weight ETF (RSP) owns the same 500 stocks as the other three discussed above, although in different proportions, and it was down 42.7% at its low.
My screens were showing dozens of ETFs trading down 30%, 40%, 50%, or more during the first hour of trading when it was obvious to me that something in the -5% to -10% range was more realistic. Panics provide great opportunities to step in and be a buyer, but they are terrible times to be a seller. ETFs have the ability to create and redeem shares in order to stabilize supply and demand imbalances and keep the trading price aligned with the true underlying value. Although price-to-value discrepancies can occur during market panics, they are typically rectified within minutes or hours.
Today, our rankings provide an excellent example of the difference between relative strength and absolute strength. Our weekly graphical representation helps to illustrate these differences. First, we calculate the intermediate-term momentum of each sector and list them from strongest to weakest. The result is a relative strength ranking that compares the momentum of each sector to the other sector categories. On this basis, Utilities is the strongest sector and Real Estate is the second strongest. The bottom of the list points out that Energy is the weakest of these eleven. Many relative strength methodologies will use such a list to justify buying Utilities and Real Estate. However, we also include a graphical bar and its value to indicate each sector’s absolute strength. In the case of Utilities, this value is negative and the bar is red. Combining the two tells us that while Utilities is the strongest sector, it only means it is falling slower than the others.
Last week, seven sectors were in the green. This week, all eleven are in the red. Utilities kept its top ranking and Real Estate maintained its second-place position. Telecom climbed four places and Consumer Staples slipped one to create a tie for third place. Consumer Discretionary and Health Care are in the same relative positions as a week ago but are now both in steep negative trends. Financials fell three spots lower as Industrials and Technology swapped places. Materials and Energy have been in negative oversold trends for months, but that didn’t prevent them from falling further.
The discussion above about relative strength versus absolute strength also applies to the style and global rankings. The Style Edge graphic provides an additional example of how information is conveyed in our combined ranking approach. Visually, all eleven red bars in the style rankings are about the same size, while the sector rankings display a wide variation in sizes. What this tells us is that all eleven style categories are acting in unison, and they all have large negative momentum values after this past week of declines. There is currently little benefit to be derived from trying to choose one style box over another as all are almost equally bad. As for the extremes, Large-Cap Growth is at the top for a fourth week, and Micro-Cap is on the bottom for a third week.
The global rankings confirm that the stock market declines of the past week were not confined to the US. Last week, Japan and the US were holding on to small slivers of positive momentum. This week, all eleven global categories are deep in the red. The Eurozone climbed two spots to claim the top ranking. However, this was not a sign of strength. Eurozone’s momentum score dropped from -7 to -41, indicating its rise in the rankings was the result of falling less than the categories it surpassed. Currency moves also helped the Eurozone relative to the US. Today, we have a three-way tie for second place with the US, EAFE, and Japan posting identical momentum scores. Last week, the US occupied this position all by itself, but this week Japan slipped down from first and EAFE climbed up from fifth. There is another tie in the middle of the pack with the UK and World Equity vying for the same spot. For the categories ranked below these two, the momentum scores fall off quickly. Canada and Pacific ex-Japan held their positions but sunk further into the red. Emerging Markets and Latin America saw sharp declines in their values, but each managed to climb a notch higher at the expense of China. China, which was at the epicenter of global selling this past week, dropped to last place.
China’s momentum value of -104 illustrates yet another feature of our rankings. The displayed values are an annualized extrapolation of the intermediate trend. In other words, the intermediate trend of the Utilities sector is currently on a -11% per year slope. For China, that slope is -104% per year. Although it is impossible for stocks to lose more than 100%, China has dropped more than 30% in less than three months. Given this disastrous intermediate-term performance, it is easy to envision how these measurements can exceed -100 when they are annualized.
“ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. It is not possible to invest directly in an index.”
– partial disclaimer for the SPDR S&P 500 ETF (SPY)
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