The U.S. and Japan outpaced Europe yet again in terms of fund flows, even as the euro-zone economy seems to look better and better. While this data from EPFR Global in Cambridge, Mass. is a rear view look, one thing is certain: the market this week has show investors not afraid to buy at the top.
“People are calling this a Trump bull market, but I think they are wrong,” says Marc Chaikin, founder of Chaikin Analytics, a proprietary investment analysis firm. “This is an earnings bull market aided by stronger numbers coming out of Europe and Asia. Historical patterns support the notion that the markets are going to move higher for the rest of 2017,” he says.
U.S. Equity Funds absorbed fresh money for the third straight week ending March 1, EPFR Global said on Friday. Global equity funds saw record setting inflows with Japan funds taking in $750 million in five days. European equity funds saw their biggest outflows in 13 weeks.
Short term investors are surely getting uncomfortable with current valuations. Informa Financial Intelligence’s chief macro strategist David Ader says his favorite contrarian measure for U.S. stocks is the Daily Sentiment Index (DSI). EPFR Global is part of the Informa services line.
“I look at this across a lot of futures and when it flashes a warning, I listen,” he says. The current DSI for the the S&P 500, based on a five-day moving average, is over 89 and I deem anything over 80 to be in overbought territory. The last time they were this high was in February 10 – 21, 2011. Three weeks later the S&P 500 fell around 6%. (Note: the RSI is a similar indicator. Punch in Apple on your screen. Over 70 is overbought. Talk about a runaway train.)
Chaikin says that market declines of 10% are more common than bigger, panic-induced sell-offs, and are often followed by new market highs.
Even if U.S. stocks are overbought, Europe stocks remain a hard sell to investors outside the continent despite evidence of a modest recovery. At the country level, flows into Sweden (EWD) hit a two-month high as economic growth accelerates. France (EWQ) continues to see redemptions on fears that euro-skept Le Pen will win the presidency in May. Outflows jumped to a 21-week high. Le Pen is currently declining in the polls and migrant-friendly, socialist Emmanuel Macron is now far ahead in the betting markets.
Within U.S. sector funds, financial and technology funds posted outflows while healthcare and utilities recorded inflows.
Utilities fund flows were the biggest since late in the second quarter but, according to EPFR Global Research Director Cameron Brandt, those inflows reflect interest rate expectations. “I also think investors finally decided to chase the gains this sector has accumulated in recent weeks,” said Brandt.
Meanwhile, redemptions in financial sector funds were only the third in the 22 weeks since the start of fourth quarter 2016. This goes for non-U.S. financials. Eurozone banks face another round of ‘stress tests’ this year and investors are still keeping an eye on Italy’s efforts to stabilize its banking sector. Greece could also weigh on sentiment in the euro-zone.