S&P 500 Record-Setting Week Lures Cash Before Ending With a Thud

  • U.S. stocks rally amid solid economic data, global easing
  • Index futures slide after markets close amid Turkey turmoil

The most hated bull market ever was finally getting some love before ending the week with another bout of geopolitical angst.

Before Friday’s hiccup, the S&P 500 Index closed at record highs on four consecutive days, something that hadn’t happened since November 2014. The sudden vigor threw open the floodgates for bulls, igniting one of the biggest buying frenzies of the last 12 months, going by exchange-traded fund inflows.

That euphoria was damped after markets closed Friday when Turkey’s army said it seized power and the prime minister vowed to resist, sending futures on the S&P 500 lower by 0.4 percent. The news stoked demand for haven assets, with Treasuries paring losses and the yen strengthening.

“Usually when things like this happen, people will sell first and then figure it out later,” said Aaron Jett, vice president of global equity research at Los Angeles-based Bel Air Investment Advisors LLC. “We’ll have to wait and see how things unfold over the weekend.”

Everything was going the bulls’ way through the regular close of markets, with cash flowing into exchange-traded funds and money managers in equities signaling enthusiasm. Managers upped their stock market exposure to 97 percent, the highest in history. Bullish sentiment helped push the S&P 500 up 1.5 percent for the week, its third straight increase and the longest such streak since June.

The glut of optimism marked a shift for the bull market that began in March 2009, which had two corrections in 10 months and just ended the longest stretch without a fresh high outside of a bear market since 1985. The dry spell ended as economic data surpassed forecasts by the most in 18 months and monetary policy around the world remained dovish.

“We’ve gone in a month from abject fear to fear of missing out,” Julian Emanuel, executive director of U.S. equity and derivatives strategy at UBS Securities LLC in New York, said in a television interview on Bloomberg Go. “The public is now coming back to the equity market.”

Investors are pouring money into ETFs tracking major equity indexes at the fastest pace since September -- at the expense of bond funds. The S&P 500, Russell 2000 Index and Nasdaq 100 Index absorbed $11.5 billion over the five days through Thursday, the most in 10 months, according to data compiled by Bloomberg. Meanwhile, flows into the iShares Aggregate Bond fund were unchanged from the previous week.

The S&P 500 has climbed 8.1 percent since June 27, a recovery that ranks with any in the bull market, after the gauge plunged to a three-month low in June following the U.K.’s secession vote. The velocity of the rebound is spurring a reallocation in the options market, where traders are piling into bullish calls and shunning defensive puts.

Investors are paying the lowest premium since 2014 to protect against losses in the gauge on a three-month basis, according to data compiled by Bloomberg. Meanwhile, short interest on the SPDR S&P 500 ETF, which tracks the benchmark index, sits at the lowest level in two months.

“I’m shocked at how quickly the market digested the Brexit vote,” said Walter Todd, who oversees about $1.1 billion as chief investment officer for Greenwood Capital Associates LLC in South Carolina. “You’ve definitely seen some validation of improving economic activity, and saying we have very easy central bank policies is an understatement. These are the types of factors that give people the green light for risk-taking.”

Active fund managers have heeded the signal. Their 97 percent equity exposure reading is based on a measure calculated by the National Association of Active Investment Managers that shows what portion of holdings are long stocks. They survey roughly 200 firms with a combined $30 billion under management, and the reply range goes from negative 200 percent -- a leveraged short -- to positive 200 percent.

Equities rose around the world in the five days, buoyed by a calming of political turmoil in the U.K. and signals from Japan and the Bank of England that more stimulus is likely. Data showing strength in the American consumer and at factories, the first major readings data since a blowout jobs report on July 8, added to signs that the economy is gaining traction. At the same time, the market is pricing in a less than 50 percent chance the Federal Reserve will boost rates before the end of 2016.

The ongoing improvement in domestic data can be seen through Citigroup Inc.’s U.S. Economic Surprise Index, which has risen 14 of the past 15 days, reaching the highest level since January 2015.

“Equities have been supported by the turn up in U.S. data surprises,” Keith Parker, U.S. head of asset allocation at Barclays Plc, wrote in a July 14 client note. “The big turn to positive territory over the last two weeks has helped push equities higher.”

If U.S. equity investors have reason to worry, it hasn’t yet registered in the CBOE Volatility Index. The so-called fear gauge fell 4 percent over five days, its third straight weekly decline, the longest such streak since March. The VIX has plummeted 51 percent since reaching a four-month high on June 24.

Earnings season got off to a promising start, even as analysts project a 5.8 percent contraction for S&P 500 companies for the period. JPMorgan Chase & Co., Citigroup and Alcoa Inc. reported profit that exceeded estimates.

“We’ve finally broken out, and we could see some continued upside,” said Todd. “But ultimately, how earnings play out will really shape the dynamic we’ll see.”

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