For confirmation that the market is now in its "blow off top" phase, contrary to claims that the market keeps "climbing a wall of worry" and that the "money on the sidelines" refuses to enter, look no further than the latest BofA "flow show" in which Michael Hartnett reports that capital markets just saw their biggest week of equity inflows since the US election ($24.6bn), another chunky inflow to bonds ($9.0bn), which combines to "the second largest week of inflows to Wall Street ever (largest was $35.5bn in Dec'2014)."
Unfortunately for active managers, the news was anything but good because for another week in a row, the big winner was ETFs with $26.3bn equity ETF inflow vs $1.7bn outflow from equity mutual funds, while fixed income saw 4.8bn bond ETF inflows vs $4.2bn into bond mutual funds; seven equity ETFs (SPY, IVV, IWM, VO, VTI, XLF, VUG) & one bond ETF (EMB) had inflows >$1bn
Another winner according to BofA: "yield": investors are still piling into "high-yielding" fixed income product with inflows to IG, HY, EM debt = $35bn past 4 weeks, fastest pace since Feb'15 (Chart 2)
Deflation>inflation in bonds: government bonds (deflation asset) see largest inflows in 20 weeks ($1.0bn) but TIPS (inflation asset) saw outflows ($0.1bn) for 4th week in five
Trump trade rotation: rotation to YTD "Trump losers" of value, small cap, financials this week as tech inflows ebb...
Tech's redemption-less wreck: nasty tech sell-off (SOX -8.4%, EMQQITR -7.3%, QNET -6.5% peak to trough) coincided with lower tech inflows but no redemptions…as noted before tech "euphoric" YTD (Chart 1), hence violent reaction to Fed policy shift
"Robin Fed": Fed hiked, announced balance sheet reduction this week to subdue Wall St speculation, not to rein-in Main St boom; Fed now acting to reduce inequality via lower asset prices; wants tighter financial conditions (loose vs history; Chicago Fed - Chart 3)
End of an Era: central banks have spent $10.8tn on financial assets since Lehman, have bought massive $1.5tn YTD inciting Icarus trade and return of tech & high yield leadership; central banks will be sellers of assets in coming years (Chart 4)
New theme...global synchronized monetary tightening: Fed, China, Canada, UK, ECB...we are in the beginning of a synchronized monetary tightening in H2
Humpty-Dumpty: won't spark immediate bear market...EPS, inflation, cash, credit positives remain; but this inflection point in monetary policy will become negative in coming quarters; Icarus trade likely followed by Humpty-Dumpty (a "big top" or big flash crash) later in year...finally volatility is a buy