Let's get to the big story.
Breakdown.
We're keeping a close eye on the financial sector on this Friday morning.
Trading volume for financial ETFs climbing sharply in recent weeks, a metric that historically coincides with major macro events.
We're also tracking accelerating outflows from the sector, rising put option volumes, while large cap banks have largely masked this weakness so far, economically sensitive areas.
Our screening as oversold at a time of a drawdown in loan-related ETFs.
Meanwhile private credit anxiety is weighing on the and asset managers stocks as surging redemption requests for withdrawal caps at some firms.
Well joining me to weigh in this morning is Todd chief ETF strategist and managing director at asset management.
Good morning, Todd.
Thank you so much for joining me.
So there are a lot of headlines, a lot of moving parts, but if we look at the financial sector in terms of the S&P 500, it is the weekly the weakest performing sector, and we are looking at a pullback of over 11%.
So I understand that economically sensitive areas like banks and the mag 7 are screening as oversold.
What does this tell you about the broader market's next move?
Yeah, Remy, great to be with you.
I, I think investors ought to pay very close attention to how the banks, insurance, private asset managers, and the mag 7 all behave over this next coming week.
They are among the oversold areas in our work, not deep oversold, but enough to catch our interest.
And you know, in a tactical sense, when you have a group so important to the American economy, right, the mag 7 companies are a major influence in the indices, the financials are the plumbing of all the indices.
Their inability to show some sort of risk appetite here is going to suggest that the markets are on weaker footing than we may think despite only being 3 to 5% off the all-time high.
So, I, I, I think it's really much a fight or flight moment for the financials.
Um, I don't want to get too negative here, but I think we are at a pretty interesting inflection point on the market and, and how they, they reflect these areas.
Yes, and we're keeping a close eye on financial ETFs.
So what are the flows telling you right now and tell us about the large banks and why you think they're masking the weakness that is happening below the surface.
Yes, so we look at ETF flows as a temperature barometer, right, on how investors look at certain groups.
On one hand, we've seen a lot of money chase industrials as they have worked, and on the other, there's a pretty good move away from financials.
I think there's concern there about.
How this private credit weakness might spread.
Now, um, on the banks, they are the largest group within the financials and industries tend to lie.
They can be skewed by megacap names, especially in a trillion dollar world.
So we've seen that from JPMorgan, Wells Fargo, Bank of America, etc.
They have massed a lot of the weakness from those private asset managers, from some of the insurance names, the regional banks and whatnot.
So I think this is a great time to look under the hood, specifically in the financial space to understand.
How widespread some of these issues might actually be, and you're starting to see it show up in corporate spreads too.
We have high yield and investment grades ever so slightly widening out and you know that's usually how more stressful environments begin when these things, you know, they were in their bottom decile.
They can't say they're too long.
I think that what is happening in financials is a reflection of that.
And I do want to get your take on what the data is telling you.
So financial ETF trading volume is surging and I understand that historically this points to a major macro event.
So what stress point is driving the behavior that we're seeing today?
Yeah, it's interesting.
Whenever you see the financials ETF volume start to really accelerate and spike, it's usually because there is some sort of event, as you've mentioned, ongoing.
Whether it's bullish or bearish depends on the context of, of the financial backdrop.
You've seen it in elections, and we saw it during COVID, during the regional bank bailout a few years ago, and now a big acceleration probably because of all the private credit weakness.
And so I would be on guard.
We are seeing more volatile headlines, right?
We have seen plenty of companies start to gate redemptions on their private credit funds.
I think what you are seeing in the financials is an exhibit of that, um, and I would also tell you.
I think just be on guard for a little bit more volatility, get more defensive if you can in portfolios.
Take a look at low volatility.
Take a look at managed futures which can help cushion the blow if equities continue to falter.
It is a great time to diversify and consider alternatives, especially if the financial landscape continues to deteriorate.
Yes, and Todd, I know you're keeping a close eye on volumes, but you mentioned two words there, and that is defensive as well as diversification.
There's a lot of noise out there right now, especially given what we're seeing in private credit.
So what does diversifying and being defensive actually look like?
Right, so you, you have an S&P 500 index that's 40% into the 10 largest stocks.
That's historically high.
You have a lot of large cap growth exposure.
You have some financial exposure in there too, as we've talked about.
So I think you want to look at things that have been out of favor for years, energy, materials, metals, and mining, right?
Those are the most forgotten sectors that investors really haven't needed over the last decade.
And now that we are seeing some pressure in the commodity space again, right, we've seen it with gold and silver and some industrial metals.
You're seeing with oil now and perhaps the ags are going to start to spike up as well given some of the events overseas.
So you're going to want to look at these sectors that have lower correlations to large cap growth, and they are going to provide the diversification and some cushion into a portfolio if we continue to see the growth and financial areas, weaken, right?
You want to, this is all about less correlated.
The real key words here are real assets, right?
Inflation-protected assets like the energy and material space. and Todd, finally, before I let you go, we have time for one more question about 60 seconds here.
So what do you make of what we're seeing in private credit?
There have been a lot of analogies made, a lot of talking heads referring to the fact that if you see one cockroach, there are probably, you know, more than just one.
So do you think we're starting to see cracks that could have a long term effects?
Yeah, well, if you look at some of the, the stocks of the companies involved in private credit, they are down meaningfully 40, 35, 40% from their highs.
We use GPZ, that's Van Eck, alternative asset Manager ETF, kind of as a proxy in the ETF world.
That one has been weaker and we also see these pervasive headlines week by week of companies having to gate redemptions and so there is a little bit of a rush to exits.
I, I, I don't love that panicky behavior.
And it's a matter of how much does this spread.
So keeping an eye on BAA spreads, TripleB spreads will be helpful.
I am watching bank loan ETFs.
That's going to be, I think another public perception.
Of what's going on in private credit, there is a bit of a wobble from the bank loan ETFs from the lower tranche CLO ETFs.
Outflows are persisting there, and so I, I, I never like when these stress points start to pop up, especially with the indices only 4 or 5% off the high.
That would suggest maybe, hey, getting defensive again like we're talking about, using energy and material, stuff that has not worked in quite some time.
Well, Todd, we will have to leave it there for today, but thank you so much for joining us on this Friday morning.
And as always, thank you so much for sharing all of your insights.
Take care.
