ETFs And The Next ‘Flash Crash’

Ulli Flash Crash Contact

MarketWatch featured an article on the flash crash of May 6, 2010. Here are some highlights:

The ‘flash crash’ turned the stock market on its ear during one violent trading day a year ago, but many investors are still vulnerable to the market’s next bungee jump. Their mistake: stop-loss orders on exchange-traded funds — a move that puts shareholders directly in harm’s way.

Stop-loss orders come in a number of varieties, and can be a smart strategy for protecting profits. The fundamental idea behind them — a set price to exit a security — makes sense, even for a long-term investor who tries not to be swayed by momentary market movements.

That said, the flash crash on May 6, 2010 exposed how the best intentions can create real problems.

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Mutual Funds On The Cutline – Updated as of 5/9/2011

Ulli Mutual Funds On The Cutline Contact

This week, it was déjà vu. With most equity funds hovering way above their respective trend lines, the juggling around the cutline occurred with bond and moderate allocation funds.

Despite fear of higher rates, this cutline report confirms the tendency towards lower ones; at least for the time being.

For example, the most sensitive bond funds are zero-coupon funds; the further out the term, the more volatility they will display as interest rates bounce around under various market conditions.

For example, BTTRX, with a maturity of 2025, is the most volatile one and moved from a -6 position last week to +16 as of yesterday. The well known Vanguard Total Bond Index (VBMFX) managed to break through to the upside to the +4 position.

With the equity markets having sold off last week, FAIRX dropped back below the line to -7 from its previous +5 position leaving only 1 lonely equity fund in the first 20 above the cutline.

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ETF Face-Off: EEM vs. VWO

Ulli Emerging Markets ETFs Contact

With over 1,000 ETFs now making up the universe, there is bound to be some redundancy.

If you cut down this large ETF pile and select only those with high average daily volume figures, which I define over $10 million, you end up with less than 100. Even in that much smaller pile there are duplications, which are necessary for healthy competition.

With all things being (almost) equal, how do you then make your selections?

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ETFs On The Cutline – Updated through 5/6/2011

Ulli ETFs on the Cutline Contact

With the equity markets losing steam last week, ETFs around the cutline (trend line) were affected by increased volatility and surprising moves occurred.

As I pointed out, you need to look for momentum figures to not only be on the positive side but also show some stability by watching their movement for a week or so. Case in point is a notoriously volatile sector ETF like PBW, which dropped from a +16 position to -12. Again, if you own this ETF, let your 10% trailing sell stop be your guide as to when to exit.

Most of the moves to the upside happened in the bond area. No surprise here, as bonds usually rally when equities fizzle. Our holding in BND finally moved from -5 to +9, crossing its long term trend line for the first time since last December.

Noteworthy on the equity side was EWJ, which headed from +9 to +20, but is now closer to its trend line than last week due to overall weakness. EEB, ILF and TUR appeared on the chart and arrived there from a level above, also as a result of the market pullback.

There were a couple of opposing moves in the muni sector, which are surprising.

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Last Week’s Lessons: ETF News And Blog Posts

Ulli ETF News Contact

In case you missed it, here’s a summary of the topics that I posted to my blog during week ending on 5/8/2011.

With a very volatile week now in the rearview mirror, consulting the Cutline tables and Model ETF Portfolios can assist you in making better investment decisions in the future, as another week loaded with uncertainties is upon us.

This week, we covered the following:

“Are Commodity ETFs Bursting?“

“Reader Q&A: How Much Of An ETF Profit Is Enough Without Being Greedy?”

“ETF/No Load Fund Tracker For Friday, May 6, 2011”

“Weekly StatSheet For The ETF/No Load Fund Tracker – Updated Through 5/5/2011”

“Oil ETFs Suffer From Demand Fear”

“High Volume ETFs On The Cutline – Updated Through 5/4/2011”

“Precious Metal ETFs: Higher Or Lower Prices Ahead?”

“6 ETF Model Portfolios You Can Use – Updated through 5/3/2011”

“How TIPs Inflate Their Yields”

“Mutual Funds On The Cutline – Updated as of 5/2/2011”

“Gold ETF (GLD) Outshines Gold Mining ETF (GDX)”

“ETFs On The Cutline – Updated through 4/29/2011”

Are Commodity ETFs Bursting?

Ulli Commodity ETFs Contact

With the commodity markets having it taken on the chin last week, this may be a good time to review what famed investment manager Jeremy Grantham had to say about this sector a week or so ago.

Here’s his view, as well as the markets in general, in “Bad China, good weather will bust commodity market ‘en masse:’”

Jeremy Grantham said there is a 25 percent chance that China, the world’s second-largest economy, will “stumble” by next year over imbalances such as too much capital spending, an overheating real estate market or accelerating inflation.

“You could have a financial stumble, a housing stumble, a stumble from rebalancing of capital spending, or any combination thereof,” Grantham, chief investment officer of Grantham Mayo Van Otterloo & Co., said in an April 26 interview in Boston.

China’s economic growth may “slow to considerably less” than the 9.7 percent pace reported for the first quarter, Grantham said. Inflation accelerated to 5.4 percent in March, the fastest pace since July 2008, adding more pressure on officials to tighten monetary policy.

Grantham, 72, is best known for his bearish outlook and for spotting asset bubbles early. He correctly forecast in 2000 that U.S. stocks would decline in the coming decade, and as early as July 2007 predicted that a large global bank would go bust amid credit market declines. He recommended buying U.S. stocks for a five-month period starting in early 2009 in what he called “my very short life as a bull.”

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