With $92 billion in market cap and $18 billion, or 20% of the float, in short interest, Sector ETF activity can provide insight into economic trends and investor sentiment. In aggregate, there were $5.7 billion in ETF outflows and a $3.9 billion increase in short interest in 2016. More interesting, is the amount of activity that occurred in these nine ETF’s post Brexit (all numbers in the chart are in millions).
Sector ETF’s with inflows were the Energy, Consumer Staples and Utilities sectors and Sectors ETF’s with significant outflows were the Industrial, Health Care, Financial and Technology sectors. On the short side, only three Sector ETF’s had a significant increase in short interest: the Consumer Discretionary, Health Care and Utilities ETF’s and the Technology sector was alone is significant buy to covers.
In general, both long holder and short holder activity was bearish post-Brexit with a net ETF outflow of $3.2 billion and a net increase in ETF short activity of $1.1 billion. Of the nine ETF’s, there was similar sentiment on both sides of the Health Care ETF, with long holders reducing exposure and selling 6% of their positions and short sellers increasing their exposure by 17%. In addition, when looking at the S3 Crowding Indicator, a measure of the magnitude of short activity relative to market cap and float, seven out of nine ETF’s (all except the XLF and XLK) had crowding events since Brexit and only one, the XLP, had an easing event. In fact, in addition to crowding signals throughout the post-Brexit time period, all seven of these ETF’s had a crowding event on August 1st. This recent activity is indicating that a portion of Sector ETF longs and shorts are predicting a pause in this market rally, and maybe even a reversal.
For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC Ihor.Dusaniwsky@S3Partners.net
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