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AdvisorShares Weekly Market Review – Week Ending 5/9/2014

Highlights of the Prior Week

Macro

Markets got their first clue as to the cost of the polar vortex (remember that very cold winter that gripped most of the country?) when the first quarter GDP printed at a surprisingly low 0.1% and subsequent trade data where the country's trade deficit narrowed less than economists expected. The combination of these two data points prompted BloombergBusinessweek to wonder if the economy has actually started to contract.

The economy has been "expanding" for five years now which raises questions about when the next contraction will come. The reason to put the word "expanding" in quotes is because of the unusual weakness in the current expansion and the extent to which Fed policy has helped that expansion along (some say a lot and some say a little). If the last contraction was unusual (worst in 80 years?) and the recovery has been unusual then market participants need to be open to the idea that the next contraction will again be unusual (even if that does not mean worse) and advisors will need to be able to explain what is happening to their clients and will need to be able to articulate a strategy to their clients for stewarding assets through that period.

For the last few weeks we've made frequent mention of the divergence between domestic small cap and large cap equities. This trend continued last week with the S&P 500 falling 14 basis points compared to a 190 basis point decline for the Russell 2000 Index. Year to date the S&P 500 is up 163 basis points compared to decline to 4.85% for the Russell.

Perhaps more noteworthy is that this week, as our friends at Bespoke Investment Group pointed out, the Russell has gone below its 200 day moving average (DMA) which is a warning sign. A small cap lag as we are experiencing now also occurred albeit more dramatically in April 2000 and in 2006 it gave earlier warning before the S&P 500's October 2007 peak.

Normal market function is that small cap outperforms large cap early in the bull market, eventually giving way later in the cycle and then performs worse during the bear phase of the cycle. Of course it does not have to play out that way going forward but this has been consistent in past recent cycles. Where there is always a bull case and a bear case at any given time, the lag in small cap goes in the bear case column.

If there is one positive in the current market action, the slope of the Russell's 200 DMA is still sloping upward giving hope that the current breach is just a head fake.

ETF News & Data

There was a large outflow from several large equity benchmark ETFs last week; SPDR S&P 500 (NYSEARCA:SPY) had $2.8 billion in outflows, iShares Russell 2000 ETF (NYSEARCA:IWM) had $2.2 billion go out and the PowerShares QQQ (NASDAQ: QQQ) lost $1.3 billion.

Domestic equity funds in total had $5.6 billion in outflows. It will be interesting to see whether funds flows, now that the ETF industry is so much bigger than it has ever been, might serve as a leading indicator for equity prices, coincident indicator or unreliable noise.

Four of the top ten on the list of inflows track various segments of the bond market but the dollars flowing in were all very small.

There were three new funds last week. Two were dividend oriented foreign equity funds from WisdomTree and an investment grade bond fund targeting subordinated debt from Deustche Bank under its db-X trackers brand.

Interesting Reads

Pacific Standard posted an article titled The Secret History of Life Hacking. Life hacks are of course those little tips that make everyday tasks easier or more efficient like using Doritos to start a campfire or microwaving two things at once by putting one item upon a plastic cup along with countless others. As the article pointed out, you've likely taken short breaks from work to look at lists of these that you found through Facebook.

The article itself while quite long given the subject matter ties the origin to increasing workplace productivity with things like shortening the distance between where work is done and where the water fountain is.

Sports

Former NBA star Tracy McGrady has found new sports life as a professional baseball player pitching for the Sugarland Skeeters in Texas. If the Skeeters name sounds familiar, Roger Clemens pitched a few games for the Skeeters, as in mosquitos, back in 2012.

McGrady's first start reportedly did not go well as he did not make it out of the second inning giving up two runs after throwing 35 pitches, only 17 of which were strikes.

It is also possible that by signing McGrady and Clemens before him, the Skeeters are showing a keen sense of marketing skill for increased attendance and increased merchandise sales.

While there is no way to know at this point whether this will work out for McGrady the idea of attempting to reinvent himself is appealing and noble. McGrady's NBA experience could be described as lots of unrealized potential as teams for which he was a major contributor never made it to the second round of the NBA playoffs and at only 34 years old he may be out of the NBA for good but his attempt at baseball represents a taking of the bull by the horns which is commendable and we wish him luck.

Roger Nusbaum, AdvisorShares ETF Strategist Source: Google Finance, Yahoo Finance, ETF.com, Barron's, XTF.com, BloombergBusinessweek, CBS Sports. Pacific Standard

 

Weekly ETF Flows

For May 5, 2014 to May 9, 2014

S&P Sector Analysis

As for the sectors of the S&P 500, six outperformed the broad benchmark - Telecom, Staples, Materials, Industrials, Energy, and Healthcare. The remaining four - Financials, Technology, Utilities, and Discretionary - each underperformed. The dispersion between the top-performing and bottom-performing sectors was roughly 3.33% this week, with Telecom outperforming all, and Discretionary coming in last.

For May 5, 2014 to May 9, 2014

Sector performances, as measured by the S&P 500 sector indices were:

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.