The Flight to Quality Continues

The flight to quality, in the sense of rebalancing portfolios to lower risk, continues while investors are trying to decipher an increasingly more complex financial and geopolitical environment.

Yesterday, SPLV, the S&P 500 index low volatility ETF, rose +0.8% to new all-time highs while its high beta counterpart fell -0.6% below 50-DMA support. In addition, XLU and XLP, the consumer staples and utilities ETFs, also moved to all-time highs.


On the above chart, the top indicator pane shows the YTD performance of SPY, 1.63% as of yesterday’s close. The second indicator pane shows a chart of SPLV, the low volatility S&P 500 index ETF, with a YTD return of 4.71%, displayed on the third indicator pane. The fourth pane shows a chart of SPHB, the high beta S&P 500 index ETF, with a YTD return of just under 0.4%. The difference in performance is huge and shows the massive flight to low risk equities while waiting for the financial and geopolitical situation to become more clear.

Note that this flight to low volatility equities is often the last step of the process before a bear market starts, which usually occurs when investors terminate rotation and start moving into cash and other markets. At this point it is not clear at all what the situation is because now there a new paradigm based on the use of quantitative easing to keep long-term interest rates down and provide reserves to institutions for equity purchases. As long as there is no paradigm shift, many investors believe that they are safe in low volatility stocks. But eventually, if high beta stocks are hit too hard, the uncertainty will spill over to low volatility stocks too because at the end of the day everything is inextricably related and no sector can exist without the others. Thus, I am not too optimistic about the future of this market if the geopolitical conflict is not resolved fast and financial conditions do not start to improve, especially as far as putting an end to an accelerating wealth inequality.

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Disclosure: no relevant positions.
Charting program: Amibroker

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