With Stocks At All Time Highs, There Is One Question Traders Can't Answer

While much has been written on these pages about the perplexing - and record - plunge in volatility across most asset classes, and especially stocks, over the past year, a time of unprecedented political and social uncertainty, which has left most market professionals scratching their heads, there is another even more vexing question that has stumped most traders: while the cumulative return of the S&P over the past three years, or since 2015, has been an impressive 34%, equity flows over the same period have been consistently negative.

In fact, as the chart below shows using data from the Investment Company Institute, or ICI, as the market continued to levitate over the past the years, over $200 billion in funds have flown out of US equities.


How is this possible?

There is still no satisfactory answer, but to DataTrek's Nicholas Colas this bizarre juxtaposition of ongoing outflows from mutual funds and ETFs with a market at all time highs, is why this remains "the most hated rally in history."  It is also why what until years ago was financial anathema, namely the suggestion that central banks manipulate stocks, is now widely accepted as a daily feature of the global capital markets. Because after all, if everyone is selling, someone else surely has to be buying? 

To be sure, there is a chance this may soon reverse: as Colas writes in one of his last year-end notes, "the first few months of 2018 could see that trend reverse, even if temporarily." Unless, of course, the outflows persist, even as the S&P rises to even higher highs, prompting even more confusion among the professional trading community which has largely given up hope that the market will ever make sense again.

Meanwhile, for those who still harbor hope that logic will eventually prevail, here is an attempt by Nick Colas to explain what may be the biggest market conundrum of all.

* * *

The most hated rally in US stock market history lives on, but why does this moniker even apply? A quick look at some fund flow data from the Investment Company Institute, which includes mutual and exchange traded funds, tells the story:

  • 2015 US equity flows: negative $103 billion
  • 2016: negative $69 billion
  • 2017 through 12/20: negative $43 billion
  • Cumulative price return on the S&P 500 from 2015 to present: 34%

Old timers (present company included) will understand why this dichotomy is so anomalous. Not so long ago when equities showed positive returns the money always flowed into mutual funds and ETFs. Now, not so much…

Flows are so bad that even seasonally strong periods no longer show positive inflows. January to April used to bring 401(k) and IRA money into US stocks as investors started a new year of contributions. No longer: the last 3 years show an average of negative $21 billion in outflows.

As for what this means for how we start 2018 in terms of US equities, two points:

#1 If January shows some early positive returns, recent history shows a ray of hope. Remember that recession scare at the start of 2016, when the S&P 500 fell by 9% in the first 6 weeks of the year? Investors noticed, and pulled $28 billion out of US equities in January of that year.

Conversely, 2017 started better, with the index up 1% in January. And inflows were modestly positive, adding $5 billion.

Bottom line: if 2018 starts off well, it may encourage investors to allocate fresh capital and help the US equity market move higher. But if we spook the horses in the first days/weeks, they have no problem running for the door. Or smashing through it.

#2 There are tentative signs that US equity outflows may be turning a corner. Note the stats we quoted at the top; the numbers are getting “less bad”. Moreover, the January to April flows into US stocks this year were positive $23 billion. Yes, the rest of the year saw more than enough redemptions to push us back into the red. But every trend has to start somewhere, and Q1 (401(k) and IRA contributions) are where you would expect it to crop up first.

Now, the key question: “Is this good news, or bad, since retail investors always buy at the top?” At this point it is hard to say; the money hasn’t shown up yet. Still, be prepared to hear “the dumb money is coming back” if 2018 starts off well.

As far as where investors are positioning with US equities as we end the year, a few data points from our friends at www.xtf.com  on ETF money flows. Yes, these are only a portion of overall flows but the ETF ecosystem does provide some useful granular information.

ETF Flow Point #1: It’s all about large caps right now. Of the $41.8 billion of US equity ETF inflows in the last month, $28.8 billion (69%) went into large cap products. The outsized winner: the SPYs, with $21.9 billion of inflows.

ETF Flows Point #2: Anything but Tech. Money flows into US Tech stock ETFs, is still OK, at $659 million over the last month. But check out these 30-day inflows:

  • Financials: $2.0 billion of inflows
  • Energy: $1.6 billion
  • Consumer Non Cyclical: $1.2 billion
  • Industrials: $1.2 billion

You can draw a straight line from the political headlines to Financials (deregulation) and Industrials (infrastructure). Energy inflows clearly show the hope that commodity prices have bottomed. As for Consumer Non Cyclicals - a group we don’t like very much – one must assume this is some year-end rotation into an underperforming group. This sector has an unfortunate combination of high valuations and low expected growth; its one merit is a higher-than-market dividend yield (2.7%).

ETF Flow Point #3: Volatility funds – those that key off measures like the CBOE VIX Index – saw $111 million of outflows in the last month. We track this group because the smart money tells us we should. The most telling thing from this month’s flows: SVXY (a short VIX product, up 165% YTD) saw $287 million in outflows this month. Whether that is profit taking or a sign of higher expected volatility in January is hard to say. We would guess it is the latter. December tends to be a low vol month, and January is often the high point on the VIX for the entire year


OverTheHedge FreeShitter Sun, 12/31/2017 - 15:03 Permalink

I'm not very clued up on the intricacies of all this, but net outflow means more people selling than buying, yes? More sellers looking for fewer buyers. Obviously, I'm not an economist, because in my world when more people are selling than buying, the price goes down. Obviously there is some technical reason why you can have lots of people selling stocks and have the price going up at the same time. It's like bitcoin.

In reply to by FreeShitter

Endgame Napoleon OverTheHedge Sun, 12/31/2017 - 15:26 Permalink

Maybe, people just have a feeling of uncertainty about the economy, resulting in “outflows.”

Could it be traditional investors who read about the heady tech boom of the 2000s, thinking that a little tech-trendy Bitcoin could rescue their retirement plans? 

Or maybe, the guidance of the Equity Bot is just not trusted, prompting the outflows from what looks like a high-sloping Ponzi.

In reply to by OverTheHedge

PT OverTheHedge Sun, 12/31/2017 - 15:41 Permalink

Baby boomers are retiring.  Instead of earning money and buying stocks they are living off of the dividends.
DIVIDENDS???? he he he he he he ...

Okay, they sell their shares but that is okay becoz the companies are buying them back and "retiring" them so they can juice up EPS.

Coming soon:  Top companies all only have one share but that one share is worth A LOT of money.  Oh, you thought the buy-backs would have to stop at one share?
Coming soon:  Companies issuing hundredths of a share and thousandths of a share becoz just like NIRP, it sounds impossible because it is stupid but then they go ahead and do it anyway.

Fraudsters steal money.
Mathematicians are hired to create mathematical "justifications" for the fraud.
Economists are hired to white-wash the work of the mathematicians to the masses.
No-one is buying pitchforks so the Mathematicians and the Economists have successfully fulfilled their duties.

In reply to by OverTheHedge

el buitre OverTheHedge Sun, 12/31/2017 - 17:04 Permalink

Maybe I am simpleminded, but it seems to me that the only way to get out of the stawk market is to sell your shares, which means someone else has to buy them.  The only way that I know of that funds can leave a rising market is corporate buybacks, which essentially vaporizes the shares.  This article is a waste of time - to paraphrase Bubba, it's the corporate buybacks stupid!

In reply to by OverTheHedge

D.r. Funk OverTheHedge Sun, 12/31/2017 - 17:31 Permalink

What the hell?

the delusion is so-stark

The rationalization involved in justifying the timeline. Everything, everything piece of logic has supported a 100% fully controlled stock market (indexes, not stock market). I said there was command and control level programming over the indexes, 4+ years ago. Magically, that continued and continues to be affirmed, in the logic, observational logic, context, and statement like yours (or this writeup) that come up over, and over, on how and/or why the indexes are moving, or have moved, how they have

Yeah, duh, no shit, obviously, outflows have outweighed because the levels are lol-complete-bullshit and the older generation while staying silent, at least know they should be withdrawing on survival level for their grandkid generation (the older generation being generally and historically where the wealth is/lays) The stock market was never moving from inflows. Or hedgies. Or smart money. Or mom and pop. It's programmed from inner circle globalist order wall st (most likely) and all the logic merely continues to support it even though everyone continues to say "youre a looney moron". except i continue to be right

In reply to by OverTheHedge

olenumbersix OverTheHedge Mon, 01/01/2018 - 05:19 Permalink

So the fed creates money out of thin air, gives to banks, banks loan money to corps, corps buy back their own stock, pool of stocks shrinks, markets total shares outstanding shrink, stocks rise ? (and/or) Central banks around the world buy up stocks, perhaps push stocks higher with futures ? If true (and me thinks it is true) fuck it stay long.  Can't beat infinite money, as long as it stays in the banks and markets. Of course you could run out of stocks/bonds to buy, oops.....................

In reply to by OverTheHedge

Roger Ramjet Sun, 12/31/2017 - 15:04 Permalink

Who's buying?  It might be time to audit the Fed.  Furthermore, if real capital has flowed out of the market, it appears to have been replaced by debt, lots of it.  As Nelson and William Hunt discovered while trying to corner the silver market in the '80s, a margin call can be very painful.

D.r. Funk Roger Ramjet Sun, 12/31/2017 - 17:32 Permalink

They yanked it up, over him. I don't how, it's possible, so few people both here and the masses, have perceived they have merely yanked the indexes a mountaintop-level higher, over trump. As either, leverage sabotage or preemptive detonation. Uh, they were rigging the thing to death for years under the 'previous guy' and we all sat here saying wtf it's f ing rigged. How the F, did that stop on Nov 9 2016. They still have control of it, uh, hello. They still had control of it, I don't know how the hell the context of the previous 5-6 trading years vanished from everyone's thought process. There's very little argument to be made that the increase since nov 16 is organic or 45 inspired. At the very least, it's decently, reasonably arguable that the indexes are fairly vulnerable, or what I would and have said, easily susceptible. To shock. or turn in narrative. And to end this - how that flies in the face of anyone saying trump's got the stock market going in amazing healthy burgeoning strength (of course also forgetting that's what happened in 07-08 and in general around peaks of obvious fake-growth or bubbles) Ps from a trumper and a solid one, learn to read focused analysis without deviating falsely

In reply to by Roger Ramjet

asteroids Sun, 12/31/2017 - 15:20 Permalink

Trillions of dollars printed up by the FED and given to the primary dealers has destroyed price discovery and any semblance of a fair market. There fixed it for yah.

ReturnOfDaMac Sun, 12/31/2017 - 15:28 Permalink

It's easy, companies buying back their own shares. Only the big boys can afford to borrow money and buy back stock, the exec's get to cash out their options, and since its only a large cap phenomenon the overall "market" goes up.  Meanwhile, no investment, job market sucks, wages stagnate, and the majority of stocks get to suck hind tit.

D.r. Funk ReturnOfDaMac Sun, 12/31/2017 - 17:37 Permalink

#1 the patterns in index movement dont coincide with a high influence coming from buybacks

2 buybacks have contributed but are a factor and at this level a sole-factor of zirp. zirp is going away

3 even if zirp remains in place where it is currently, it has just been artificial propping anyway. fake. fake--bullshit.

4 that fake bullshit is reflected in things like Shiller(Pe) which Solely show a massively-extended divergence/disparity/gap, between level and reality, price and reality

What an attitude. You are so complicit in the eventual inflection. Laughoutloud. The turning of the tide to reveal what's been underneath. Go eat a rock

In reply to by ReturnOfDaMac

ReturnOfDaMac D.r. Funk Sun, 12/31/2017 - 19:13 Permalink

Ok Dr.Funk, I'll bite.  PE's are crazy because company treasury's don't give a shit.  Anyway, start here


But do your own fucking due diligence before you call me complicit (I just profit from shearing sheep, I don't get dirty fleecing 'em myself). 

Keep searching and you'll find out how many hundreds of billions were looted from S&P 500 companies by execs' in buybacks in 2017 alone.

Try salt and pepper with your rocks, adds a little kick.

In reply to by D.r. Funk

MrBoompi Sun, 12/31/2017 - 15:54 Permalink

Yes, many damaging market selloffs have occurred over the years, but over time the market has tended to rise. What do you think happens when something rises from 2000 to 24,000 over the course of 100 years?  How many reports were written during the last 100 years warning that the market was at all time highs?  It's not so much the stock market as much as the money injection system inflating it.  

An Shrubbery MrBoompi Sun, 12/31/2017 - 21:49 Permalink

Yes, stock prices are high, but volumes are low. It's all this helicopter money sloshing around the globe, looking for a place to park and earn a decent return. It makes no sense to buy bonds at ZIRP or NIRP. As the ECB continues to crumble, prices may go even higher, as big money looks for a lifeboat.

The only money I have in the market is my retirement money, which is trapped. If I try to pull it out all at once, Uncle Sam takes half. Although Trump's tax break might ease the pain somewhat. Half of something now, might be better than half of nothing later...

The only other option is to roll over into FDIC insured CDs and try to ride it out. What to do, what to do...?

In reply to by MrBoompi

Archive_file Sun, 12/31/2017 - 16:17 Permalink

Just a heads up from the underground:

I live in my van in San Francisco and have been delivering food to tech and financial companies for years. 

Just an observation, but I think anyone interested in crypto needs to keep an eye on or invest in a crypto called “RaiBlocks (XRB).” It has the potential to be very disruptive. 

It’s a “Dag-coin.” It isn’t mined. It makes transfers instantly, it is decentralized. Transferring money is FREE. It’s on a few exchanges. It has a great team behind it. It was worked on for a few years prior to its release. It is being whispered about here in town. 

Put simply:

BTC = Gold

Ripple = for the banks.

RBX (RaiBlocks) = for the masses.

Now you’re in the know...


JibjeResearch Sun, 12/31/2017 - 16:33 Permalink

Don't worry about the Stock Market, it's not your unless you have shares.

Count your money, where ever it is, that's the place that matters to you. 

1. $1 Million in net wealth is like middle class.

2. $2 Millions in net wealth is somewhat rich.

3.  You can not/should not get into bond, you'll end up losing regardless (Asian bond is ok if the return is greater than 4%, but still not the best).

4.  In stock, you might have a chance if you pick the right one.

5.  Don't get into passive Index stocks, you'll get nailed in the Assssss.

6.  Have a business or renting property.

7.  Get into cryptos now because this is a wealth generator.  This is the best way to beat the majority of middle class and Elite class.

Stormtrooper Sun, 12/31/2017 - 17:25 Permalink

Ha, ha, ha!!!  Amstel Rothschild finally wins!!  "I don't care who controls the government.  I only want to control the money supply".  Trillions of funny money later and his clan owns virtually all public companies thru their central banks.  And, Americans still don't get it.  Until, all of a sudden they will pull the plug and Americans will get it.  Good and Hard!

yerfej Sun, 12/31/2017 - 20:19 Permalink

It is simple appreciation suction that is pulling prices higher without volume, as the fed accelerated the quantitative easing the prices had to head higher and this in turn created a vacuum effect that has remained in place to this day. Once the feds new quantitative impeding becomes mainstream revolumizing will commence.