One week after US stock funds suffered "massive" outflows, on Friday BofA reported that a record $43.3 billion had been put into equities "as investors shrugged off trade war risks that had initially sent stocks reeling", even as those very risks returned in the subsequent week and pressured the S&P lower on four out of five consecutive days.
The record inflow also came one week after JPMorgan warned that based on the recent "erratic behavior of retail investors... and the spreading of equity ETF outflows out to non-US equities" the idea that retail investors will serve as the marginal buyer of equities in the current environment was in jeopardy, "especially after buying an unprecedented $100bn of equity ETFs in only one month during January."
Not for long though, because as we reported on Saturday, just hours after BofA was "stunned" by the record "wall of money" flooding into stocks, JPMorgan was as well, and in his latest "Flows and Liquidity" note, JPM's Nick Panigirtzoglou wrote that "equity ETFs saw a very big inflow of $34bn this week (Monday to Thursday). This is by far the highest weekly equity ETF flow ever, driven almost entirely by US equity ETFs."
"Equity ETFs saw a very big inflow of $34bn this week (Monday to Thursday). This is by far the highest weekly equity ETF flow ever, driven almost entirely by US equity ETFs." - JPM pic.twitter.com/0o0cM4mouQ— zerohedge (@zerohedge) March 17, 2018
According to JPM, this means that "there is little doubt that, following an interruption in February, retail investors have resumed their equity ETF buying in March" at least until the market's next sharp swoon."
There was more good news. Recall that 2 weeks ago we reported that according to Morgan Stanley, market liquidity defined as the available size at the top of the book in the US equity futures market - i.e. how many futures can trade without impacting price - had tumbled to near record lows, and failed to rebound since the February volocaust.
Not anymore though because at the same time as retail investors resumed their equity ETF buying, emerging as the marginal buyer of equities again," JPM found that "equity market liquidity appears to have rebounded sharply and is also normalizing.
Ameria's largest bank shows this in its own prop version of market liquidity in Figure 2, "which updates a price to volume based indicator of volatility for the S&P500 Emini futures contract to proxy for market liquidity. This proxy is called the Hui-Heubel liquidity ratio in the academic literature and captures the impact of volumes on prices or market breadth. This liquidity indicator appears to have normalized to before February correction levels."
Predictably, this is generally good news for the bulls, and refutes JPM's worries from two weeks ago; as Panigirtzoglou writes, "contrary to our previous fears, the two near-term downside risks for the equity market we had mentioned previously, market illiquidity and the absence of retail support, appear to have diminished."
Which simply means that, as noted above, "retail is once again the marginal buyer of equities."
What's the not so good news? Well - for one - the rather strange fact that despite the record inflow into stocks last week, the market actually closed down for the week.
So what is holding the equity market back then?
As it turns out, JPM asks just that same rhetorical question, and says that the most likely answer is the apparent cautious stance of institutional investors. JPM then explains why it knows this:
The unwillingness of institutional investors to add risk can be seen in their betas to the equity market. Equity Long/Short hedge funds have been reluctant to raise their betas in recent weeks. Their most recent betas (for the period Mar 5th to Mar 14th) 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. The equity betas of Discretionary Macro hedge fund are still hovering around zero. And those of CTAs have gone down rather than up vs. the previous weeks. The only betas that have increased in the most recent period between Mar 5th to Mar 14th are those of RiskParity funds. This is not surprising given their vol targeting and given the normalization in both equity and rate vol spaces.
Confused? Don't be: as we explained yesterday, the selling by institutions to retail has resumed.
Institutions resume dumping to retail:— zerohedge (@zerohedge) March 17, 2018
"retail investors have resumed their equity ETF buying, emerging as the marginal buyer of equities again" - JPM
And once momentum-chasing retail investors have served their purpose and soaked up enough of the equity inventory held by institutions, that's when the rug gets pulled from under the market, a crash follows and the entire cycle repeats itself as panicked retail investors dump into bid and sell at any price, and when institutions are no longer "cautious", and instead jump in to take advantage of the coming firesale.
Meanwhile, it may come as a surprise to some, but ever since the financial crisis, institutions have been the most stubborn sellers of equities in the world.
Incidentally, the above chart showing relentless selling by virtually every investor class in the past decade means there is just one question for traders: when do the stock buybacks finally stop?