Have Profit Takers Set Their Sights On “Top 200″ ETFs?

With the S&P 500 garnering 4.6% in less than 3 weeks, are money managers becoming skittish? If hundreds of millions flowing out of a few select ETFs is any indication, then the answer is, “Yes.”

On 1/19/2012, institutional advisers used their block accounts to  dump roughly $120 million of iShares Russell Top 200 Growth (IWY) and $80 million of iShares Russell Top 200 Value (IWX). In a single trading session, IWY shed 1/4 of its total net assets under management; similarly, IWX lost more than 1/2 of the assets in its coffers.

Granted, the moves may be more indicative of dissatisfaction with these particular exchange-traded vehicles. After all, similar outflows did not appear in the Russell 1000 Large Growth Fund (IWF) or the iShares Russell 1000 Large Value Fund (IWD).

On the flip side, consider the Relative Strength Index (RSI) for each of four large company ETFs mentioned. For example, in the chart of Russell 1000 Large Growth Fund (IWF) below, RSI hit the “70″ level 3 previous times in 2011 — February, May and July. In all 3 instances, IWF either pulled back significantly or sold off dramatically.

 

Here in the very first month of 2012, IWF has hit “70″ once more. Wouldn’t some profit-taking traders be tempted to cash in their 6-week gains of 10%+? Keep in mind, the pattern for iShares Russell Top 200 Growth (IWY) is eerily similar to the Russell 1000 Large Growth Fund (IWF); the pattern is also similar between the iShares Russell Top 200 Value (IWX) and iShares Russell 1000 Large Value Fund (IWD).

 

I’m not suggesting that investors sell every last equity holding. However, I would advise investors to be very cautious on putting new money to work. It makes sense to wait for a bit of a pullback.

Earnings may beat expectations, China may loosen monetary policy, investors may chase returns and European bond auctions may continue to proceed smoothly. Nevertheless, the slightest excuse for investors to lock in some profits may come with the smallest bump in the road. What if the ECB hesitates on cutting short-term rates or if it chooses to forgo quantitative easing? What if the pending Greek default is not “orderly?”

Indeed, some institutional block traders may be deciding to “lock in” their gains now. By way of an additional example, outflows exceeded $72 million today (1/19) on the SPDR MSCI ACWI ex-US Fund (CWI). On the surface, the dollar amount may not sound like much. However, under the hood… the outflow represented 13% of the total assets that CWI had under management.

Obviously, ETF outflows are not the end-all on future trends. Sometimes, one or two big advisers may be making whole-scale changes for rebalancing or for jettisoning less liquid ETFs in their portfolios.

Nevertheless, it makes sense to keep an eye on the RSI trends. In May and November of last year, when SPDR MSCI ACWI ex-US (CWI) hit the “70″ level, it sold off shortly thereafter. CWI is not far from that RSI level right now.