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

    On the week, 21 of 26 categories ended up.  Of these 21 categories, 17 ended up at least 1%, with the largest gains seen in Russia, Latin America, and China.  Of those 5 categories that were in the red, only 2 were down more than 0.3% - short funds, on the wrong end of the market this week, and real estate funds, still plagued by the on-going subprime and rate worries.

    It's interesting as well to note that the categories with the highest correlation to the S&P after retail were Russia and MSCI.  Those with the lowest correlations after short funds were currency, convertible, and call-write funds, as is typically the case.

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 ETF/CEF Category Return

    A combination of surprisingly tame inflation data, strong payroll numbers, and falling energy prices resulted in a week of broad market gains.  Over the week, the largest gainers were real estate, Latin America, and emerging market funds by far.  Small caps, emerging markets, commodities, and retail funds ended the week with strong inflows as well.  A relatively quiet week and falling energy prices seems to have tempted large numbers of investors back into these higher-return assets, especially given their possibly oversold prices after last week's volatility.

    To the downside on the week were only short funds; no other category ended red or even unchanged.  The worst performing categories, though still positive, were healthcare, utilities, currency, convertible, dividend, and large caps.  With the VIX indicating overall market volatility fell 7% and the RVX indicating that small cap volatility fell 2%, it's not surprising that the more conservative asset classes saw a slow weak.  It is interesting to note, however, that healthcare was actually more negatively correlated on the week than short funds.  This is perhaps the result of the difference in performance between the S&P and the other indexes on which there are short ETFs, but such a strongly negative correlation is a trend that warrants further attention.

Dollar-Weighted ETF/CEF Category Return

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.

Dollar-Weighted ETF/CEF Category Return