Major inflows, near-record sentiment, analysts chasing the market rally

Fund flow

The big 4 U.S. equity ETFs (SPY, QQQ, IWM, and DIA) saw major inflows in November and December. The following chart illustrates a rolling 2 month sum of fund flows into these 4 ETFs:

Historically, this was a bearish reading for stocks over the next 2 months:

But now that January is almost over and stocks rallied since December, does this mean that the bearish signal is invalidated? Not quite:

Investor positioning is still stretched, and this remains a warning sign for global equity markets.

Sentiment surveys

Regardless of which survey you look at, sentiment is extremely high. The National Association of Active Investment Managers’ Exposure Index is at its highest level since December 2017:

Back then, the U.S. stock market rallied for another 1 month (blow-off top) before a correction began.

Meanwhile, AAII Bullish %’s 11 week average remains elevated:

This is a neutral reading for stocks over the next few months, although the most recent historical cases leaned bearish:

Analysts are ratcheting up price targets

Analysts continue to ratchet up their price targets in order to not be left behind by the market rally.

Historically, this was a minor short term worry:

Updating some indicators:

And finally, it’s time to update some key indicators.

Relative Gamma Exposure‘s 1 month average is at one of the highest readings ever. Historically, this consistently led to pullbacks and corrections over the next 2-3 months:

*this indicator divides Gamma Exposure by the S&P 500’s value to account for the stock market’s changing value over time:

The SKEW Index’s 5 week average is at the highest level since 2018. Remember: stocks fell in Q4 2018.

*SKEW Index is often referred to as a “black swan” gauge.

Here’s a quick look at sector-by-sector fund flows. The past year saw massive inflows into tech and healthcare, while energy and financials saw a recent surge in inflows.

And finally, the more money a company loses, the better its stock performs…

Conclusion

  1. Short term trend followers should continue to ride the bull trend because no one knows exactly when it will end.
  2. Medium term traders should go neither long nor short.
  3. Long term investors should be highly defensive right now. This speculative bull market may last another 6 months or even 9 months, but in 2 years time, long term investors will be glad they did not buy today.

2 comments add yours

  1. The latest from Jeremy Grantham:

    Legendary investor Jeremy Grantham says Biden’s $1.9 trillion stimulus plan will make the stock market bubble even worse

    Grantham said a portion of the stimulus will end up in stocks, instead of aiding production and capital costs.

    The GMO co-founder told Erik Schatzker that he has “no doubt” some of the stimulus aid will end up in the market. He said the “sad truth” about the last stimulus bill passed in 2020 was that it didn’t increase capital spending and didn’t increase real production, but it certainly flowed into stocks.

    “We will have a few weeks of extra money and a few weeks of putting your last, desperate chips into the game, and then an even more spectacular bust,” he added.

    Well, if he’s even half right, it could get very exciting, especially for anyone who is on margin.

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