Have you ever been to a restaurant for the first time and it was completely empty? Then after you eat your email you leave thinking, “That was the best meal I’ve had in a long time, how could it be so empty?” While you might wonder how a place you find so good could be so empty, in the end you probably just care more about the food being good. Moreover, since no one else eats there, you know that the next time you go you won’t have to wait to get seated. You can walk in, sit down, and enjoy your meal right away. Welcome to the current state of the stock market, where the food is great and you can get seated right away.
Wondering where we’re going with this? Well one of our main reasons for being bullish on stocks is the fact that a bullish trend is in tact yet bearish sentiment is at high levels. This negative sentiment is reflected in a recent Bank of America Merrill Lynch report titled, “The Flow Show.” The report focuses on equity fund inflows and outflows, i.e. whether or not people are putting money into the market, or pulling out of it. After reading the report, we feel good about our bullish thesis based on negative sentiment. Take a look at some of these tidbits:
- US equities see another $2.4bn outflows = 6 straight weeks of redemptions = longest losing streak since Jan’10
- Japan bucks trend with tiny inflows ($29mn)
- Bonds: $4.8bn inflows = strongest in 6 weeks
- Hard to generate big downside for equity prices if the public is not in the market (they have been sellers over past 5 years). Put another way, terrible as opposed to just bad news is needed to make markets sellof
- Appetite for Equities continues to fall: chunky equity redemptions this week of $7.2 billion (driven by Europe) – Worst April equity outflows in 16 years
As you can observe, people continue to pull money out of the market even though the uptrend is very much in tact. In addition, the only major market that saw inflows (though small) was Japan. A quick glance at Japan’s stock market index (Nikkei - $NIKK) shows that it is 6.8% off of its 2012 highs, vs the S&P500 which is only 1.5% off of its 2012 highs. Furthermore, the NIKK hasn’t yet broken above its highs of the last 2 weeks, a feat SPX accomplished this past week. Why someone would rather be in an index that isn’t breaking out makes no sense to us.
Merrill also reports that April saw the worst equity outflows for the month in 16 years. They go on to point out that when you don’t have many people in the market, it is hard to generate big downside in markets. This is because big downside can only be possible when there are high levels of supply and all of these people pulling money out now is essentially limiting any future supply.
Lastly, if you look back to January 2010, the last time the market suffered a similar streak of equity outflows, the weeks that followed were quite bullish. SPX closed that month around 1,075. From that point thru the month of March, SPX rose 11.6%. We imagine all of those people who pulled out on the way down 1,075 probably felt pretty stupid about missing out on an extra 11% gain.
Our thesis remains the same, negative sentiment continues to be a very attractive reason to be bullish on U.S. markets. The only thing that will change our mind is if we see a change in the trend and all we have up to this point is a series of higher lows and higher highs off of the October bottom. We’d like to see the 1,380-1,392 range serve as support moving forward as SPX attempts to break its 2012 highs around 1,420.
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