It seems that buyers have rediscovered their appetite for London-listed equities
As the U.K. government continues to vote on various facets and permutations of their impending "Brexit" from the European Union (EU) on what now seems to be a near-daily basis, the iShares MSCI United Kingdom ETF (NYSEARCA:EWU) has rebounded sharply from its bear-market lows of Christmas Eve 2018. Shares of the exchange-traded fund (ETF) have advanced 17% from their Dec. 24 close at $28.56, with an extra lift provided by the resounding enthusiasm with which traders reacted to the outcome of last week's parliamentary votes (which somehow managed to add both a tinge of clarity and a dash of new uncertainty to the Brexit proceedings, in a uniquely British manner).
By Friday's close, EWU had not only ramped above its 200-day moving average for the first time since June 18, but it did so for three consecutive sessions to end the week. The strong weekly finish above this benchmark trendline follows a late-February breakout by EWU above its 160-day moving average, which was quickly confirmed by a successful retest of this level as support earlier this month.
And prior to that, EWU had concluded January with a decisive takeout of the key 80-day moving average that had capped its late-September highs. The strength of the U.K. equity fund's bullish trend is backed up by its 14-day Average Directional Index (ADX), which is holding above 30 -- pointing to a high-momentum move up the charts, as opposed to the final legs of a waning rally.
The powerful price action in EWU this year has been accompanied by steady inflows from investors; etf.com data shows not a single day of net outflows for the fund in calendar year 2019. On a year-to-date basis, specifically, EWU has garnered $286.79 million in net inflows -- which is not too shabby, but which accounts for less than two-thirds of the $452.19 million in net outflows clocked by EWU during the period from its late-January 2018 high through year-end.
Coincident with Friday's five-month high in EWU shares, though, the 30-day at-the-money implied volatility (IV) skew on EWU options briefly climbed to 55.6%, in the 95th percentile of its annual range. This means that EWU puts have been more expensive relative to their call counterparts, from an IV standpoint, only 5% of the time during the past year. (Close followers of EWU volatility anomalies will observe that this reading is still a far cry from the Nov. 1 reigning 52-week IV skew high of 134.8%.)
In the case of an equity-based ETF like EWU, rising demand for put options could be the result of increased demand for the shares among hedged players, who buy puts to offset their long equity exposure. From this viewpoint, the relative "expensiveness" of EWU puts compared to calls could simply be a side effect of hedged investors regaining their appetite for London-based stocks -- just as it seems Brexit is lurching ever closer to collapsing completely (suggesting this may well be the market's "preferred" outcome at this point).
That said, possible profit-taking levels to watch for EWU in the short term include $34.27, which marks a 20% gain from the Dec. 24 closing low (and thus, the official "exit point" from bear-market territory). Notably, $34.29 was the intraday high for the shares back on Sept. 28, as the financials-heavy fund gapped lower amid anxiety over Italy's budget. And closer to Friday's closing price of $33.42 is the 320-day moving average at $33.93, which previously contained the February 2018 low. And finally, year-over-year breakeven for EWU will be in the directly overhead $34-$35 range for the next three weeks.
Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, March 18.