Although it’s fun to bad-mouth the rally, the yo-yos who have stoked it could win in the end. From the moment stocks took off on December 26, we’ve been ‘certain’ it was just a bear rally designed to fool everyone into thinking new highs were actually possible. It would need to be powerful enough not only to convince the rubes that this was so, but to switch off the warning circuits in the brains of hardcore permabears such as your editor. We remain skeptical that new highs are coming, even as we put our rational thoughts aside to consider solely the evidence on the charts. No matter what happens, let’s not forget that Mr. Market’s primary mission is to fool as many investors as possible, and to wreak havoc on the best-laid plans of bulls and bears alike.
Mr. Market’s Intentions
- February 19, 2019, 8:06 am
Rainbows End…
S&P 500 Equal Weight ETF 2009 low to 2018 high +420%
SPX 2009 low to 2018 high +340%
The ETF market is to the mortgage-backed securities market circa 2004-5 where a finite amount of home loans were parsed, sliced and diced into more and more complex derivative instrument.
September 2010 Bogan Associates report, “Can an ETF Collapse?” that Mndlin remembers claimed not only were ETFs responsible for the May 6, 2010 flash crash, but ETF shorting and excessive ETF redemptions can cause a fund to keel over and die.
Like many innovations in finance that emerge from nowhere to explode in popularity with unknown consequences, exchange-traded funds (ETFs) have gone from obscurity when they were first invented in 1993 to making up more than half of all the daily trading volume on American stock exchanges today. They also made up 70% of all the canceled trades during the Flash Crash on May 6, despite representing just 11% of listed securities in the United States, suggesting that ETFs remain poorly understood by both investors and regulators.
May 6, 2010 Flash Crash, 70% of halted securities were ETFs. On Aug 24, 2015 when markets plunged, there were 1,000 ETF volatility halts.
Too many ETFs are dependent on the same stocks.
2017, 14 of the 15 most actively traded securities last year were ETFs—has raised concerns about what the fallout of this trend could be. Essentially, the fear is that if a stock’s shares outstanding are concentrated within ETFs, its daily moves will be dictated more by the buying and selling of the funds, rather than by the company’s own fundamentals.
Despite disappointing returns for equity investors, ETFs still managed to attracted over $300 billion of inflows for the second consecutive year in 2018.
“ETFs second consecutive year with over $300 billion in flows was a first for the industry. Nonetheless, three out of the five major asset class focuses had a decrease in assets: Equities, Commodity and Specialty,” Bartolini said. “Considering that equity focused ETFs made up 80% of all ETF assets to start the year, if their assets decline, so do the industry’s.”
The market for index funds has reached $6 trillion, while the market ETFs has ballooned to $5 trillion.
The greatest expression of the popularity of passive investing is the fact that there are now more indexes than there are individual stocks in the market!
Market manias are not easily seen, in fact one of the main traits of such one in place is to observe that few are even many start suggesting they are ahead.
Have a great day.