Volatility has been the word of the month, and though last week saw much of it, the market ended overall much further to the downside. 

    For the week, only 5 of 26 categories ended up, with only short and convertible funds ending the week up more than 1%.  Of the 21 categories that were down, 17 were down more than 1%, 15 were down more than 2%, 9 were down more than 3%, and 4 were down more than 5%. 

    For the month now, only short funds are up, with the remaining funds down on average 8.5%. 

    As far as the week's correlations go, other than short funds, only commodity, municipal, and infrastructure funds had S&P correlations below 50%.

    Dollar-Weighted Category Return

Dollar-Weighted Category Performance

    On the week's dollar-weighted performance, only 2 of 26 categories ended the week black - short funds and China funds, returning a respective 2.87% and 1%.  Another 3 categories ended the week only marginally red, falling at most 0.36% percent - currency funds, Japan funds, and broad Asia funds.

    The remaining 21 categories were down at least 1% (call/write) and, at worst, nearly 7% (infrastructure).  Of these categories, the average return was nearly 3% down.

    With the week at last done, there still does not seem to be a single non-psychological motivator for the broad market losses.  Both gold and oil ended the week down, but stock and bond market returns do not seem to match what we would expect in such a week. 

    One possibility I offer as a suggestion is that foreign investors, having enjoyed the past two months, view the current dollar strength as a local maximum.  The US Dollar Index, having dropped throughout the market rally, is believed by most to continue to decline in the medium-term.  Given this, then regardless of their investment type, the current dollar high would provide them the best return after conversion to their home currency, thus explaining an otherwise unexplainable lack of historical correlation between asset classes.

Dollar-Weighted Category Return

    Wednesday saw continued outflows with 24 of 26 categories trading down, bringing 14 of 26 categories to red for the past week.  The worst percentage losers for the day were Latin America, emerging markets, and Europe, all trading down over 2%.  Dollar-weighted European ETF returns are now nearly break-even for the past month.  Note as well the incredible 97% correlation between the Latin American ETF returns and the S&P 500 over the last week.  I would avoid Latin American ETFs as alternatives to US markets right now if you're looking for diversification.

    Those categories that were significantly less negative than the rest of the market are convertibles, call/write, commodities and resources, and Japan, as had been seen in Tuesday's market summary.  Given the possibility of a market down-turn, I would most favor the writer funds, as selling calls is pure profit in falling markets.

    The only two categories up were currency ETFs, just by a hair, and short ETFs.  This week's US data, combined with the ECB tick and strong Australian data, has accelerated the dollar depreciation trend.  As the dollar loses strength, watch for increased downside risk in transports, utilities, and Asian funds.

Dollar-Weighted Category Return

    21 of 26 categories ended Tuesday down, with the average category trading down -0.40% with an average dollar flow out of 3 million.  The worst outflow was in small caps with 33 million red, followed by real estate, utilities, and large caps.  The only two categories that saw non-negligible dollar inflows were short funds and China, despite the volatilitly that Chinese markets have experienced this week. 

    It's interesting to note which categories have had the lowest correlations to the SPY in the last week.  Those with negative correlations are convertible funds, China funds, and currency funds.  Low but positive categories include Japan funds, commodities and resources funds, call-write funds, and broad Asia funds.  Asian markets have remained strong despite high volatility and dramatic swings, ignoring changes in the bond and currency markets that could point to troubling costs and inflation in the coming cycle.

Dollar-Weighted ETF/CEF Category Return

    12 of 26 categories were negative to start the week, as gains in crude and gold led to to a somewhat bearish underlying attitude.  Most affected by this trend were infrastructure and transports, both having seen a 3%+ week return prior.  Note as well that despite the 5% increase in VIX from Friday's close, small cap ETFs still closed above large caps.

    To the upside on Monday was primarily energy, driven by crude prices, as well as Asia, real estate, and retail.  Though Asia funds may attempt to continue their uptrends into today after high volatility in Asian markets, retail and real estate will likely feel the heat from this morning's retailers' negative assesments and the possible bond swings resulting form Bernanke's comments today.

NB: The original market cap values were very wrong, thanks to order of magnitude errors in E*Trade's data.  Thanks to Steven Towns for the corrections.

    Though the number of competing ETFs in the market has been increasing dramatically, broadly profitable market conditions have kept adverse conditions from weeding many out.  Though the crude contango complaints that have surfaced in the past few months may represent a thread that will be common in the coming years, most sectors do not seem to currently face this level of criticism.

    In analyzing CEF and ETF options for investment in Asia, Japan, and China, there are a number of trends I spot.

1. Japan funds have on average more than twice the market cap of either China or Asia funds.
2. Asia funds have on average more than twice the dividend yield of either China or Japan funds.
3. China funds have the highest average expense ratios, while Asia funds have the lowest.

    All in all, I have a relatively hard time rationalizing specific country exposure when the broad Asia funds seem to have a number of advantages in management costs and obvious increase in geographic diversification.

    The full tables I used are below.

Dollar-Weighted ETF/CEF Category Return

    Worst performers this week were infrastructure and utilities by far, losing a hefty sum.  Though infrastructure ETFs and CEFs are still up 7.5% YTD, utilities are dropping back down within 1% of January's prices. 

    On the week, there was a relatively modest selloff in emerging and more volatile foreign markets, with Asia and Latin America seeing the majority of the downside.  China had a particularly volatile week, and China and Latin America seems to be very strongly correlated with the US markets right now.

    Notable were two other points - call/writes funds profited from the increase in volatility this week, with the VIX movement triggering an increased premium in options, and the divergence between small and large caps continues.  If you're been keeping up, I've covered the VIX-vs-small-vs-large-cap relationship in some detail.  At week end, since last Friday, large caps have fallen 0.5%, whereas small caps have risen nearly 1%.  The iShares Russell 2000 tracker IWM has been one of the highest volume securities in the entire world market over the past week, even beating all other index ETFs on the low-volume Friday.

Below are top gainers and losers for the day and week, as well as top changes and amount in dollar liquidity.

    News of a Russian deal with former USSR satellite states Turkmenistan and Kazakhstan hit the wire early Saturday morning, and the implications of this agreement are obvious for a number of funds.  Notable among these is the brand new Market Vectors Russia, which follows the DAX Global Russia Index, which has about 13% in OAO Gazprom, the Russian state-owned oil company that will likely see the most benefit from this move.  TRF likewise has a 3.4% Gazprom weight, and although CEE is closed, it is another Central Europe/Russia fund to watch.