Trader’s Narrative

While sentiment data and my proprietary sheeple index are interesting, they are both circumstantial evidence.

To see what people are actually doing, we have to look at funds flow or liquidity data. The last time I brought this up was last summer when a skittish public started pulling out significant funds as a result of a small correction in the markets. That had panic written all over it and as a contrarian, one would interpret it as bullish since it took very little to scare people enough to have them pull money out.

Right now we aren’t seeing that sort of fear in the market. However, as we have come to suspect from the other evidence (sentiment and traffic data of online brokers), the retail investors are not believers in the US markets. In fact, they are putting money to work everywhere and anywhere except the US markets.

According to AMG Data: Last week, for data including ETFs, investors pulled $1.6 billion out of the US markets and in contrast, sent around $700 million to work in non-domestic destinations. In April domestic funds saw net outflows of -$4.9 billion while non-domestic funds reported net inflows of $20.2 billion.

So while the average investor is shunning the US markets, they are hitting within spitting distance of all time highs. Interesting. Where are they putting their money? In the emerging markets: Asia (except Japan), Latin America (especially Brazil and Mexico), Russia and Western Europe.

In the face of such evidence, I wonder how people can continue to call this market “frothy”? or the price action, “a melt up”?

But although funds flow data is an accurate and meaningful gauge, it must be approached wtih the right time frame. As the example from last summer, it works great when you have a medium to long term point of view. Anything shorter and it isn’t really helpful.

While a bull market requires active participation by the retail investor, today it is the private-equity sector who is the primary force behind the demand for equities. Every day we read about one large deal either rumoured, announced or concluded. My take is that as the market moves higher, the retail investors will ultimately succumb and start to buy stocks again. And finally, as in all cycles, in the later stages we’ll have a real “melt up” and “froth” as the masses rush to invest in a hot market.

But until then, we’ve got a long ways to go.