Friday, September 02, 2016

Another Month Of Equity Outflows

Individual investor sentiment continues to show a low level of bullishness and this has translated to continued outflows in equity mutual funds and exchange traded funds. Almost a month ago I noted the strong outflow from equity funds and ETFs that occurred in July and this selling trend continued in the month of August.

The outflows have caused assets in equity mutual funds to decline while equity ETF assets have increased on a year over year basis as of the end of July. The increase in ETF assets is largely due to the strong equity market returns from a year ago, for example, the S&P 500 Index is up over 12%.

Mutual fund and ETF flows indicate investors have taken a majority of the equity proceeds and invested in bonds as noted in the first table above and as seen in the below chart.

For investors, markets tend not to peak when bullish sentiment is at such a low level. Markets have a tendency to reach a top when euphoria is at a high.

For the S&P 500 Index, it has been stuck in a narrow trading range for a month and a half, but, a few positive technicals are now in place that would coincide with a market advance. As the below chart shows, the accumulation/distribution line is in a positive up trend, the money flow index is near an oversold level and the stochastic indicator has turned slightly positive.

Much has been written about the fact September tends to be the worst month for equities going back to 1928. However, as Ryan Detrick noted in a recent report, over the last 10-years, the S&P has averaged a positive .3% return and has been higher 6 out of those 10 years. With the elevated skepticism of the market at the moment and knowing the election is around the corner, the market might just surprise to the upside over the balance of the year, but certainly not in a straight line move higher. 

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