Float Research: Demand Indicators Point to Jolly Holiday Season for U.S. Equity Investors

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Demand Indicators Point to Jolly Holiday Season for U.S. Equity Investors. ETF Flows Turn More Encouraging for Short Term.

Our demand indicators suggest the stock market party can keep right on rolling through the holiday season. Reflecting the impact of ongoing Federal Reserve stimulus, our demand indicators remain very favorable for the intermediate term and have turned more favorable for the short term. Any market dips should be treated as buying opportunities.

ETF flows have turned more auspicious for stocks in the short run. Investors in leveraged ETFs, who tend to be poor market timers, turned more pessimistic. They pulled 0.6% of assets out of leveraged long ETFs in the past week and added 0.4% of assets to leveraged short ETFs.

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Another encouraging sign is that U.S. equity ETF flows have subsided. These ETFs issued $1.5 billion (0.2% of assets) in the past week, and the trailing one-month inflow has fallen to a modest $4.9 billion (0.5% of assets).

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Equity Fund Inflows Subside in November, and Almost All Inflows Directed into MFs Rather Than ETFs. Outflows from Bond Funds Accelerate.

As a whole, fund investors have turned more cautious on stocks this month after pumping $53.2 billion into all equity mutual funds and exchange-traded funds in October, the fourth-highest monthly inflow ever.

What is most striking is that almost all of this month’s inflow of $18.9 billion into all equity MFs and ETFs has been directed into MFs rather than ETFs. While U.S. equity MFs have received $7.6 billion, U.S. equity ETFs have issued just $200 million.

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Similarly, while global equity MFs havereceived $9.8 billion, global equity ETFs have issued only $1.3 billion.

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Our conclusion is that retail investors are more upbeat than institutional investors and financial advisors, who account for the bulk of ETF trading.

Nevertheless, inflows into equity MFs are not high enough to be too alarming from a contrarian perspective and are nowhere close to record levels.

Meanwhile, bond funds are posting redemptions for the sixth consecutive month. Bond MFs and ETFs have redeemed $22.2 billion, already topping the outflow of $19.2 billion in October. Redemptions are picking up as the average fund has dropped 0.6% in price, the worst performance since August, when the average fund’s price fell 1.5%.

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Philly Fed Manufacturing Survey Weak across the Board. Even Long-Levitating Future General Activity Index Falls Sharply.

Like the Empire State Manufacturing Survey, the Philadelphia Fed Manufacturing Survey was mostly weak, which is consistent with our analysis of income tax withholdings and key credit indicators. We remain convinced the economy is in worse shape than Wall Street thinks.

The headline diffusion index of current activity fell for the second consecutive month, dropping to a six-month low of 6.5 in November from 19.8 in October. Forward-looking indices also declined. The new orders index dropped to a three-month low of 11.8 in November from 27.5 in October, while the unfilled orders index fell to a five-month low of -4.2 in November from 9.1 in October.

As in the New York area, manufacturers in the Philadelphia area are far more upbeat about the future than they are about current conditions, but even the long-buoyant outlook declined. The future general activity index fell to a three-month low of 45.8 in November from 58.2 in October.

11.22.13 pic 6 Source: Federal Reserve Bank of Philadelphia.

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