Earlier this week, when looking at a variety of market positioning and technical indicators, Goldman strategists laid out 7 reasons why, in their opinion, professional investors were bailing on the market even as retail investors continued to buy. These included:
- Since January, “Professional ETFs” have seen outflows while “Retail ETFs” have seen steady inflows.
- Futures show a reduction in net exposure for equity and bond investors over the past 7 months; however, institutional investors seemed to re-risk in equities during September.
- Borrowing costs are increasing quickly as rising rates exacerbate the impact of widening credit spreads.
- Equity volatility: increase in 2018 has been smaller than in 2007, but started from a higher level.
- Market Makers providing less electronic liquidity in SPX Futures markets.
- Corporate leverage is in decline: Decrease in Debt Issuance, increase in Cash Balances are only partially offset by Buybacks.
- Economic impact of equity declines.
Now, picking up on this odd trend which has seen pros dump their exposure to risk while retail investors dig in, is Bank of America, whose CIO Michael Hartnett writes in his latest flow shows that the fear from Wall Street has yet to grip Main Street.
As evidence he references BofA's Private Client ETF holdings (which now amount to $2.3 trillion in AUM) which show high net worth investors buying equities, and selling bonds, in reversal of BofA's "playbook" from the four weeks preceding the last three prior market panics including Feb’16, Oct’11, and Mar’09.
It's not just this week either: using client data flow, BofA notes that individual investors bought stocks while institutional and hedge funds were net sellers for the third week in a row, almost as if Joe Sixpack is convinced that central banks will bail him out even as institutions are increasingly worried their money printing god has forsaken them.
Meanwhile, thanks to retail demand, equity buying by all the firm’s clients rose last week to the highest level since late May.
This retail resilience, and persistence in buying, is a troubling sign to some. Speaking to Bloomberg, Liz Ann Sonders, chief investment strategist at Charles Schwab said the tenacious retail buying is a sign the selloff that has wiped out $2 trillion from equity values may keep going until buyers are exhausted.
“I would love to see the individual investors more fearful right now,” she said by phone. “It doesn’t quite feel yet that we’re at the kind of washout point. This probably has more to go.”
Going back to the data, BofA found that private clients snapped up more than $1 billion of stocks last week - with bulls unbowed despite the market losses - the most since February and the sixth-largest in data going back to 2009. It is likely that the retail buying has continued this week, even as stock buybacks have been largely absent from the market.
The recent retail buying frenzy followed a month when individuals went almost all in on stocks. In September, cash as a percentage of assets among Charles Schwab clients fell to 10.3%, the lowest since at least 2004. At TD Ameritrade Holding Corp., client activity jumped last quarter, with average trades per day on the brokerage site surging 50 percent over the past year to 795,000.
This relentless retail optimism is "suggesting confidence by retail investors that the bull market isn’t over,” according to BofA strategist Jill Carey Hall.
Of course, it may just mean that as pros are dumping retail investors are delighted to keep buying, and they will do so until they run out of money, which unfortunately will take place long before the "pros" are out of assets to sell. The question then will be whether corporations will be willing to unleash the biggest stock buyback wave seen yet. If the answer is no, that's when the real bear market will begin.
Finally, while equities saw modest inflows in the latest week, most of it on the back of retail investors, institutions were busy dumping other assets, with the outflows from Investment Grade bonds in the past 8 weeks hitting a record $25.2 billion...
... while financial stocks also suffered their biggest 4 week outflow on record.