Hedge funds and professional money managers keep selling stocks

Dion Rabouin
·3 min read

With euphoria taking over the stock market, so-called smart money investors like hedge funds and asset managers at major investment firms are hitting the sell button, expecting prices to fall.

What we're hearing: Retail traders were the only group to buy U.S. equities for the third week in a row as institutional clients sold equities for the third straight week and hedge funds sold for the fifth week, posting their largest outflows in more than a month, Bank of America's data analytics team reported in a note to clients.

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  • BofA's clients sold both single stocks and ETFs for the second consecutive week, with overall four-week average flows near record lows and the lowest since mid-January.

  • "Clients were net sellers (-$2.2B) of US equities for the third week in a row as the market reached another record high and equity sentiment marched further toward euphoria," analysts said.

Watch this space: The rolling four-week average of money flows from hedge funds hit a record low in BofA's data history (which dates back to 2008) and were three standard deviations below the average.

  • "The only other time flows were this extreme was at the end of last August after which the S&P 500 declined by 2.5% and 2.3% in the subsequent one and four weeks, respectively," analysts noted.

On the other side: U.S. households increased their exposure to stocks to 41% of their total financial assets in April, the highest level on record, WSJ reported, and stock funds have seen net inflows for seven straight weeks.

  • Since March 2020, equity allocations have risen more than 3.5-times faster than they typically do following bear markets.

  • Flows have been underpinned by record borrowing from hedge funds and big banks, as well as a record level of margin debt being held by retail and institutional investors.

  • Corporate buybacks also have increased notably and year to date are up 19% versus last year's levels at this time.

Where it stands: The market has not declined by 5% in six months, which happens on average three times a year, and it's been 14 months since the S&P 500 had a 10% correction ("a once per year phenomenon, historically"), BofA equity and quant strategists Savita Subramanian and Jill Carey Hall said in a note.

One level deeper: Sell-side analysts are recommending stocks at increasing rates, with BofA's sell-side indicator rising for a fourth consecutive month to its highest in 13 years.

  • "The current level is ... the closest to the 'Sell' threshold since May 2007, after which the S&P 500 declined 7% in the subsequent 12 months," Subramanian and Hall wrote.

  • "Increasingly euphoric sentiment is a driver of our more cautious outlook as we believe that vaccine deployment, economic reopening, stimulus, etc. are largely priced in."

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