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Equity Fund Flows Indicate We Are Not in a Bubble?

Every week, let me kick-off by highlighting some of the more interesting data points on the markets.

Looking through some of these data might give us an idea how euphoric and overbought the market is, extreme fear and low participation, or just choppy.

These are not buy signals or sell signals but it may give you an appreciation about the trend of the markets.

Fresh Money Flows More to Bonds than Equity!

The data that caught my attention this week was this fund flow chart put out by Jurrien Timmer, the director of Global Macro at Fidelity.

Here is a bigger chart:

It shows the cumulative fund flows into bond exchange-traded funds and mutual funds (unit trust in this part of the world) and equity exchange-traded funds and mutual funds.

As we invest in equities, we might have this world idea that everyone seem to be getting into equities.

I learn pretty late that the bond market is huge versus the equity market.

A lot of people want to “own the market”.

If you want to own the market and have a global portfolio, you should have majority of your allocation in bonds.

By tilting your portfolio to equities, you have a certain “active” philosophy that is different from the market. You probably believe enough in the market-risk premium or you are doing a minimum form of factor investing.

From the chart above, the total equity buying was barely positive over the last 12 years. From 2013 to 2020, people have been buying stocks. I think in bull market, people buy stocks.

Equity funds and ETF barely taken in fresh investments since March 2009 GFC bottom.

The fresh money went to…. bonds.

And despite where bond interest rates are right now, the fresh money is going into bonds.

So is equity in a bubble? or the bonds?

This data from Investment Company Institute (ICI) is coherant from the weekly data put out by Yardeni research. I just took a look to make sure this data is not so wacko.

Ed Clissold from Ned Davis Research show us that inflows into equity mutual funds and ETF have been running at record since Feb.

It is interesting that the net fund flows have been OUT of equity from 2018 to 2020 despite the market going up. I think the large dip in outflow coincide with the low point in end 2018 when the market went on a 20% fall.

Extremely high or low readings seem to coincide with market turns.

If we zoom out, perhaps they are indicative of “corrections”, just that we do not know the magnitude.

A High Number of Stocks Above their 200 days Moving Average

We zoom out to see a 20-year chart of the percentage of S&P 500 stocks that are above their 200-day moving average.

The 200-day moving average is slow moving and if a greater amount of stocks are above their 200-day moving average, it lets us know that markets are humming along nicely. If it is below, there is probably enough distress.

The number of stocks above their 200-day moving average is high. Perhaps the last 2 times that happened was at the start of two bull runs than at the end.

Perhaps it is the extreme high and low readings is more indicative of something than the direction of this chart.

If you are a longer-term investor, most of these gyrations in the middle don’t seem to mean much. Ok, it might mean we suffer from -5% to -15% corrections.

Half of the Stocks above their 50-Day Moving Average

The number of S&P 500 stocks above their 50-day moving average is abit of a mix bag.

I think this indicates we are in those markets with a lot of volatility but no meaningful crash danger.

Again, extreme high readings (above 85%) and low readings (below 10%) seem to be bullish.

We are Greedy but Not Extremely Greedy

The famous CNN Fear and Greed Reading shows that we are greedy but not extremely greedy.

Buy when there is fear is good. Buying during extreme greed may not be very rewarding.

Again, it seems for longer term investors, extreme readings are more important than the gyrations in the middle.

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Humji Investor

Sunday 25th of April 2021

The equity fund flows chart is interesting. It suggests that since 2017 there has been net outflow out of equities. I've found an alternate source which is suggesting similar flows ( Wonder how equities keep getting pushed up with decreasing participation? Does it mean that prices are just being bid up more quickly?

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