Last weekend, and subsequently last Friday, we showed that at a time when virtually every other investor class had stepped away in the chaos of the February "Quant Qrash", corporations were in the process of unleashing the biggest buyback streak in history, one which if JPMorgan is right, will result in an unprecedented $842BN in stock buybacks this year.
In retrospect, and in order to keep the market from plunging, this corporate buyback surge couldn't come fast enough, because as JPM also warned over the weekend, the retail bid appears to be disappearing.
In a report by JPM's Nik Panigirtzoglou, the strategist cautions that the "erratic behavior of retail investors this past week and the spreading of equity ETF outflows out to non-US equities" has jeopardized the idea that retail investors will serve as the marginal buyer of equities in the current environment, "especially after buying an unprecedented $100bn of equity ETFs in only one month during January."
Essentially, JPM's thesis can be summarized as follows: we were confident the retail dip-buying mentality would guarantee a rebound in stocks after the February slide, especially with quants on the sidelines; however, recent flows suggest that this is not happening. In other words: America's biggest bank is suddenly worried that retail is no longer buying the fucking dip. This is how JPM puts it:
We showed last week that equity ETF buying had been improving over the previous two weeks following a large outflow of $20bn in the week ending Feb 8th. We noted that this improvement was important for the bullish thesis, as it will take some time until momentum improves and vol normalizes inducing institutional investors including CTAs and other trend following investors to start building up long equity positions again. In other words, we had hoped that retail investors, perhaps induced by "buying the dip” mentality, were emerging as the marginal buyer of equities. This past week has shaken this hope for two reasons.
What exactly is it that has shaken JPM's faith in the Pavlovian reflex of retail investors, cultivated by years of central bank intervention to assure that no stock market crashes are ever again possible?
- This week has been one of the most erratic in terms of equity ETF flows, with a large inflow on Monday and Tuesday being reversed on Wednesday and Thursday (Figure 1).
- For the first time since the correction began, the outflows spread out to ETFs that invest outside US equities.
If JPM is right and retail is indeed no longer the marginal buyer, what are the consequences? Well, one doesn't need to be a rocket scientist to figure it out: as JPM writes, "the potential withdrawal of retail investors as the marginal buyer of equities could create clear downside risk for equity markets for the near term - especially after buying an unprecedented $100bn of equity ETFs in only one month during January."
Worse, the disappearance of retail as a gullible buyer of last resort (and recall that it was almost exactly one year ago that JPM warned that institutions are now aggressively selling to retail), would come at a bad time: not only because institutional investors appear to be unwilling to become the marginal buyer in a backdrop of elevated volatility, something we touched on last Friday, but also because as Morgan Stanley warned, market liquidity has collapsed...
... even as signs of the strong growth momentum over the past 6 months having peaked given recent disappointing
On the topic of institutional unwillingness to add risk, JPM writes that this can be seen in their betas to the equity market.
Both Discretionary Macro hedge funds and Equity Long/Short hedge funds have been reluctant to raise their betas in recent weeks. Their most recent betas for the past week appear to be below their levels at the beginning of the year. And these beginning-of-year betas were far from elevated, in fact they were just below historical averages.
Of course, all of this would be moot if corporations - the single biggest buyer of stocks since the financial crisis, with over $3 trillion in equity purchases...
... were rushing to launch their announced buybacks. However, JPMorgan is worried that share buybacks "might take some time to materialize."
Under these (troubling) circumstances, what is JPM's conclusion?
In our mind the biggest near-term risk for equity markets is a breach of the lows we saw on Thursday Feb 8th. Anecdotally, during that Thursday, fundamental equity investors came close to capitulation, so revisiting these lows raises the risk of capitulation and thus of a more serious correction beyond the 10% decline seen between January 26th and February 8th. And the more persistent the market liquidity deterioration proves to be , the higher the chance that this near-term risk materializes.
In other words with retail BTFDers sidelined, Goldman's buyback desk better have many more record weeks in the coming months, or else the bouncing dead market cat is about to have a very painful reintroduction to gravity.
Delivery for Goldman's buyback desk pic.twitter.com/044MLr261S— zerohedge (@zerohedge) March 2, 2018