Forecast: Clear Sailing For Stocks?

You can’t help but be bullish on stocks now. I mean, really. That’s the simple message being told by the ETF market. Well, two ETFs to be sure.

Take a look at the price spread between the SPDR SP 500 ETF (SPY) and the iShares SP 100 ETF (OEF). It’s widening. Nothing new in that: the SPY portfolio’s been gaining on OEF since early 2009. From the looks of it, though, there seems a lot more widening yet to come.



“So what?” I hear you say.

Consider this: the SP 100, a subset of the SP 500, is made up of the bluest of the blue chips. This traces back to the benchmark’s birth as the CBOE 100. In 1983, the Chicago Board Options Exchange fashioned the index from the stocks underlying its most actively traded contracts. Given the listing requirements then in effect, the stocks in the SP 100 tended to be largest issues in its parent index.

The SP 100’s median market capitalization is four times higher than that of the SP 500. The narrow index, too, has a lower price-to-earnings ratio, a higher dividend yield and lower volatility. Still, the correlation between the two metrics is very high.

All this says the SP 100 is a more defensive play on U.S. equity than the SP 500. Put another way, if you’re an aggressive bull, you’re more likely to pick the broad market as your playground rather than its more staid subset. Likewise, when your risk appetite diminishes, you’ll tend to eschew all but the biggest stocks.

The four-year congestion area anchored by the Great Recession’s 2009 bottom at $33  set up a run to the $105 level. Between March and May this year, the $105 level was tested three times before a breakout to the upside. Now SPY’s premium is $110 and, if the bulls continue their hold on the market, a $138 premium is in the cards.

The SPY/OEF spread’s a risk barometer and it’s saying there’s still some clear sailing ahead. Keep a weather eye peeled, though, for any gathering gloom on the horizon.


Monday, July 28th, 2014 EN

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