Which ETF Has Money Trickled To

ETF

Market momentum is Red. I know that might be confusing, given that markets rallied again today. However, we still have low volumes and significant selling across the S&P 500. We had as many stocks fall by 10% this week as we did jump by 10%, so a slow-paced burn upward has materialized. That said, only three sectors have moved into positive territory.

This morning, the SPDR Energy ETF (XLE) had a nice pop, pulling Occidental Petroleum (OXY), our subject from yesterday, even higher. But the rally was short-lived. As I previously noted, put volumes on the XLE last week hit its highest since June 2008, right before oil prices peaked in July 2008. 

Recessionary woes are picking up again. So, money isn’t pouring into energy, huh? Well, where is it going?

Where Money is Flowing

Capital has flowed into the strangest of bedfellows. First, healthcare stocks are coming off a tough downturn over the last two months. Second, biotech stocks rallied today on the back of the SPDR S&P Biotech ETF (XBI). That fund rallied from $67 to $77 in the last week. I can’t say that I believe this rally will be sustainable. However, that sector reached oversold territory after the negative momentum switch on June 8. 

I have to urge caution because so many biotech stocks are still trading well below the cash value on their balance sheet. When this occurs, investors don’t believe that the small- or mid-cap biotech firm will complete its trials or find a willing buyer. If the CPI number is high or the Fed needs to increase rates more aggressively, then look for these stocks to reverse quickly. This is very speculative capital in this space. 

That said, institutions – particularly hedge funds – had their sharpest level of selling LAST week in roughly 15 years. The market was experiencing a bit of a reset on the back of the Quad Witching event last Friday. Markets now largely expect a recession, but it also anticipates that the Fed will cut interest rates in 2024. In that case, we’ve seen money slowly move into some safe-haven spaces. 

First, we’ve seen a lot of buying around the utility sector, which has caught a bid this week. The SPDR Utility ETF (XLU) had a steady rally higher all week. Remember that utilities operate in the space of need for the American consumer and businesses. Utilities are typically one of the safer assets because of the natural inflation hedge as well. 

Second, money has moved back into consumer defensive stocks – another reset trade as money flows back into Coca-Cola (KO), Tyson Foods (TSN), and other names. Next week, I’m looking for a controlled burn higher for these stocks to continue. We had a positive swing in consumer defensive (or staples) on Friday afternoon. 

It’s Quiet Next Week

We don’t have any significant events next week. Sometimes, boring is the best way to go in this market. There likely won’t be a wave of institutional capital flowing into individual stocks, but we could see a lot of action around the ETFs. 

I doubt you’re worried about Japan’s unemployment rate, inflation in Europe, or manufacturing levels in Brazil. Those reports will arrive next week. It’s quiet in the U.S. Because July 1 falls on a Friday, the U.S. Labor Department will not release the June jobs report until the following week. CPI data doesn’t arrive until July 13, and the Fed doesn’t meet until the end of the month. 

So, in this reset trade, there is a likelihood of capital moving slowly into the market into the more conservative areas. I am looking at the Consumer Staples Select Sector SPDR ETF (XLP) $72.00 call for Friday, July 1, 2022. It closed Friday at $1.22. 

You have a probability of profit of 40% on this trade. So it is “In the Money.” But understand that you need the stock to go higher. You are paying about 40 cents in time premium… but just one good move higher on Monday can give you a nice gain to start the week. As always, use a trailing stop. Since we want to be cautious, you can set a trailing stop of 25%.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

Related Articles

Which Sector

Which Sector to Look To

Market momentum is Red. Today, markets largely reacted to the blisteringly high CPI figure that showed consumer prices increased 1.3% month-over-month. While some institutions believe

Read More »
Which Sector

Which Sector to Look To

Market momentum is Red. Today, markets largely reacted to the blisteringly high CPI figure that showed consumer prices increased 1.3% month-over-month. While some institutions believe

Read More »