Investors have been actively hedging their portfolios in November leading up to the election tomorrow. Activity in the three major index ETF’s, the Spider S&P ETF (SPY US), iShares Russell 2000 ETF (IWM US) and the Powershares Nasdaq Trust ETF (QQQ US) has been volatile in the last three months in tandem with election volatility. With $256 billion in aggregate AUM and large trading volumes, these three ETF’s are a good representation of portfolio hedging activity by both retail and institutional investors. By looking at daily ETF inflows and outflows we can measure the general sentiment of long shareholders and by looking at daily changes in ETF short interest we can measure the general sentiment of short sellers. The net activity of both the longs and the shorts in these three ETF’s will give us a consensus on whether investors are looking to hedge out or add more Alpha exposure to their portfolios.
From January to August 2016, ETF activity was mixed with a bearish view in the IWM and QQQ ETF’s with over $7.9 billion of ETF outflows and an increase in short interest while investors were bullish on the blue chip S&P 500 SPY ETF with $6.9 billion of inflows and short buy to covers. Both the Democratic and Republican primaries were still in full swing in the beginning of this period but by August, Donald Trump had surprisingly gained momentum on Hillary Clinton with both candidates around a 40% polling average. Investors sold off $2.5 billion of their long ETF’s but also covered $1.4 billion of their short positions – a net $1 billion market movement over the eight months would be considered bearish to neutral in sentiment.
September began with Hillary Clinton surging in the polls and Donald Trump slumping, but reversed momentum by the end of the month. ETF activity was also mixed, with a bullish\neutral sentiment throughout the month. The IWM and QQQ ETF’s were still bearish with $698 million of outflows and increased short interest, but although the SPY ETF had $3.9 billion of ETF outflows it also had $5.0 billion of short covering. Netting the activity in all three ETF’s gives us $412 million of slightly bullish trading activity as Hillary Clinton increased her lead in the polls.
October saw a continuation of Hillary Clinton’s strength in the polls and she passed the 45% polling level for the first time, while Donald Trump’s polls dipped below the 40% level before recouping his losses by month-end thanks to Wikileaks. Hillary Clinton’s widening lead over Donald Trump in October saw $1.8 billion of bearish activity in the broader IWM Russell ETF but over $6.9 billion in bullish activity in the more narrow SPY S&P 500 ETF and QQQ Nasdaq 100 ETF. The SPY and QQQ ETF’s had over $3.6 billion of ETF inflows and $3.3 billion of short covering – both longs and shorts were increasing their net market exposure with Hillary Clinton firmly in the lead.
Donald Trump’s momentum continued in November with his polling numbers nearing or exceeding Hillary Clinton’s depending on the state or poll that is used. With Donald’s Trump’s numbers on the rise ETF activity turned bearish. Long shareholder activity in the IWM and QQQ ETF’s was minimal, but the SPY S&P 500 ETF had over $2.5 billion of outflows. ETF short selling activity was consistent as each ETF saw an increase in short selling with the SPY S&P 500 ETF leading the pack with over $3.7 billion of the $4.5 billion of total short sales of the three ETF’s.
With Donald Trump gaining momentum there has been a conspicuous increase in major market hedging activity via ETF shorting along with the removal of major market exposure by selling off long ETF holdings. This is continuing to hold true as we are seeing almost $1.9 billion of new ETF shorting activity today. If the last three month’s trend continues, tomorrow we should see a final bullish push if Hillary Clinton’s poll numbers surge overnight or a final bearish push if Donald Trump’s numbers grow.
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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