Doomed stock rally burns fewer bulls after US$10b ETF exit
STOCK dip-buyers across the ETF world have vanished after seeing their account balances ravaged too many times in the 2022 meltdown.
Three times, to be specific. That's the number of 5 per cent bounces that have failed to endure in the S&P 500 this year - luring billions of dollars to exchange-traded funds in every rebound. Not this time.
As the S&P 500 jumped more than 6 per cent through Friday (Jun 24) from its 2022 trough, roughly US$10 billion was pulled out of equity funds, data compiled by Bloomberg show.
The bearishness has proved prescient this week as the selloff resumed in earnest, with the S&P 500 sinking 2 per cent on Tuesday.
The outflows add to evidence that investor sentiment is souring after the once-successful strategy of buying the dip cratered.
At some point in the last 2 weeks, hedge funds tracked by Morgan Stanley slashed their equity exposure to the lowest level since 2009. Meanwhile, retail investors gave up on their long-held bullish stance, selling shares at the fastest pace in almost 2 years.
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All the bearishness may eventually set the stage for what contrarians view as a sustained recovery. But for now, it reflects growing trepidation that any bounce is nothing but a bear-market rally, with the Federal Reserve committing to the most aggressive tightening cycle in decades to fight red-hot inflation.
"Buy-the-dips is a good strategy when the Fed is easing and injecting liquidity into markets," David Donabedian, chief investment officer of CIBC Private Wealth Management, said in an interview. "Sell-the-rallies is a better trading strategy in a Fed-tightening mode. I don't think we've seen the lows of this bear market yet."
Technology megacaps bore the brunt of the selling on Tuesday as the Nasdaq 100 tumbled more than 3 per cent, extending its 2022 loss to 29 per cent. Down more than 20 per cent from its January peak, the S&P 500 is stuck in its second bear market since 2020.
Futures on the S&P 500 were little changed as of 7.15 pm in New York.
The lack of inflows into stock ETFs of late is a notable departure from May, when traders poured US$30 billion into the funds during a 7 per cent market bounce. A similar recovery in March saw inflows amounting to US$42 billion, while another in January was met with addition of more than US$5 billion.
All these attempts of bottom-fishing proved futile as the S&P 500 reversed its course, hitting fresh lows one after another along the way. Now the stock-market bottom feeders have dodged this latest slump by selling the recent rip.
"Investors are increasingly worried about a recession, and are dusting off their bear-case scenarios," said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors. "There's also been a reassessment of the Fed - right or wrong," he said, referring to the risk that the central bank will fight inflation at all costs, even if it's at the expense of growth. BLOOMBERG
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