Will Retail be Left Holding a Bull Bag?

After setting a record 42 days without recording an up or down day in excess of 1%, albeit while notching incremental new highs, the S&P 500 Index is exploding up some 1.25% following Trump’s first speech to Congress.

It certainly seems like all systems go for a new leg higher but there are questions regarding just how sustainable this move will be. The first concern? Thus far all the buying is based on optimism about policy promises surrounding tax, regulation and infrastructure. The reality regarding specifics, implementation, and timing have yet to be revealed.

The second concern is more ephemeral in nature, namely is this a final blow off top luring in the last retail investors before leaving them holding the bag when this now 8 year long bull market comes to an end?

Recent money flow data suggests the mom and pop retail investor, who have been very reluctant to buy stocks in the years since the financial crisis, may finally be embracing the bull. Maybe it’s the headlines of new highs and positive reinforcement of growing 401k balances stirring the animal spirits that have them piling in. But it comes at a time when professional and institutional money managers are pulling their horns.

Over the past week two major banks, CitiBank (C) and JPMorgan (JPM) institutional investors and hedge funds have been quietly selling stocks, while the retail may be the “last man in”, which has typically marks the final rush of bull markets.

Yesterday Bank of America (BAC) released its latest weekly client flow trends report, and what it found was even more of the same. Bank of America clients’ optimism continued to wane last week as clients sold US equities for the second consecutive week, after having been net buyers the prior 14 weeks since the election, with four-week average flows turning negative for the first time since November as well. Net sales were $988 million, with sales of single stocks eclipsing small purchases of ETFs.

But what stands out is for the second week in a row, hedge funds and institutional clients were all net sellers; hedge funds have the longest selling streak at four consecutive weeks while private clients, aka retail investors, who have been the most aggressive buyers in the past few months, continued to be net purchasers.

What did the pros sell? Pretty much everything. Clients sold large and mid caps but bought small caps, after sales of all three size segments the week before. BofA clients were net sellers of single stocks across all 11 sectors last week – the last time this occurred was two weeks prior to the Brexit vote in early June where the market subsequently sold off 6% from peak to trough. Of course it then rocketed higher in the weeks following the vote.

Stretch Marks

Even if we are not heading into a final blow off it would seem stocks are certainly setting up for a pullback. This is suggested another record the S&P 500 is setting; the index is now on track to end the week 10% above its 50 day moving average, having previously never closed a week at premium of over 8% above the 50 dma. This is truly a stretched market.

The conclusion is, a bear market may not be imminent, but between rush of retail and extended state stocks may be due for a breather – one should lighten their load so as to not be left holding the bag.

— Steve Smith

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About the Author: Steve Smith