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Chart In Focus

SPY Assets Zooming Higher

Chart In Focus
December 22, 2016

During the post-election stock market rally, there has been a huge push into ETFs, and especially into SPY.  It is the largest of the ETFs tied to the SP500 Index.  It is normal to see fluctuations over time, with total shares outstanding rising and falling as prices do the same.

This is a normal function of investor sentiment.  Rising prices get people more bullish, and so they pile into the market.  Falling prices scare people away, and they sell.  The sponsoring firm of SPY, State Street, responds to that changing demand by issuing or redeeming shares in exchange for cash or the underlying stocks, in order to keep the share price close to the net asset value (NAV). 

Generally speaking, when there is a huge surge of buying into SPY that pushes the shares outstanding number up above the upper 50-1 Bollinger Band, that can be a sign of a meaningful top for the overall stock market.  The corresponding point can be made about dips below the lower band marking price bottoms. 

So on the surface, the big surge in SPY shares outstanding since the election seems to be a huge sign of a major top for the stock market, on account of huge bullish sentiment.  But this is where the interpretation gets more complicated.

It turns out that a big surge into SPY is a regular feature every December.  Here is a longer term chart to illustrate that point:

SPY Shares Outstanding

The arrows highlight the late December surges into SPY that seem to happen every year.  So why would this be?  The answer has to do with big mutual funds and other portfolios. 

Trading gets thin in December, as everyone focuses on Christmas and buying a G.I. Joe With The Kung Fu Grip for their kids (to paraphrase Billy Ray from Trading Places).  So if someone tries to drop a big order for an individual stock into a thin market, they know that they will move prices in an unfortunate way, so big funds hold off from buying or selling out of their own stocks during the last two weeks of December.  But they still want to maintain “market tracking” on any new money that comes in.  So they park that money into SPY, or into futures if they are set up for that.

Later when trading volumes return to normal, these portfolio managers ease their way out of their SPY positions and back into their chosen list of stocks.  For this reason, examining SPY shares outstanding in the month of December through early January is pretty much useless as a sentiment indicator. 

Now, to the difference this year: The post-election rally has caused the normal year-end surge into SPY to appear much earlier.  Maybe it is a genuine case of overly bullish sentiment among retail investors.  Or maybe it is a case of PMs seeing a surge of new money into other funds that they cannot efficiently put to work in their chosen list of stocks, and so for market-tracking reasons they are parking those new funds into SPY earlier than normal.  It is hard to know. 

So what is the point to take from this?  There are a lot of phenomena at work on the financial markets.  So when you see an apparently anomalous behavior of some indicator, it can be useful to take a longer term perspective, and perhaps see the recurring behavior of other forces which might explain what you think you are seeing. 

Tom McClellan
Editor, The McClellan Market Report

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