Just Buy The Dip? FBN Says Don’t Overthink Stocks

For nine straight days, the buy-the-f##king-dip crowd has been ubiquitous. Day after day the 'checkmark' pattern has confirmed what JPMorgan detailed about retail ETF-flow-driven buying panics into the end of day liquidity.

We previously showed how, according to JPMorgan (and BofA), the recent market levitation has been entirely on the shoulders of "animal spirited" retail investors plowing money into ETFs, coupled with CTA's forced to cover into a gamma squeeze, even as hedge funds and institutions have been selling to retail investors. Well, as it turns out, the mechanics behind the recent move higher also explain such observations as Friday's last second levitation.

As JPM's Nikolaos Panigirtzoglou explains, "the picture we get is of institutional investors either lowering their equity exposure YTD or keeping it unchanged. This apparent unwillingness by institutional investors to raise their equity exposures YTD reinforces the argument that it is retail rather than institutional investors that most likely drove this year’s strong inflows into equity ETFs and as a result this year’s equity rally. And the fact that retail investors use passive rather than active funds to express their bullish equity views has important implications."

The main implication is that this shift towards passive funds is elevating the importance of retail investors in driving markets. And retail investors’ sentiment is transmitted to markets more quickly via passive funds. This is because these passive funds have to rebalance by the end of the day, different to active funds that have the discretion to wait before they deploy their cash balances.

In turn, JPM adds, this end of day rebalancing means that equity trading becomes even more concentrated at the end of the day as passive funds grow. Passive funds typically rebalance at the end of the day because transacting at the closing price better aligns the performance of passive funds to the performance of the index they track.

And this end of day trading concentration is reinforced by the secular reduction in market depth and liquidity since the Lehman crisis. As market depth declines, the execution of large trades is postponed until the end of the day when more trading takes place, reinforcing the end of day trading shift induced by the expansion of passive funds. To get a sense of the underlying market transformation, YTD 37% of the NYSE trading volume took place during the last 30 mins of trading.

In fact, as Bloomberg's SMART Money Flow Index shows (which tracks the relative performance of the closing ramp to the rest of the day), the last 13 days have not had one down day…

But as Bloomberg notes, there is another explanation for the afternoon strength in U.S. stocks. According to FBN Securities technical analyst JC O'Hara, cash is going into stocks as sovereign wealth funds re-allocate to equities from bonds, "using the U.S. as their primary market of choice."

Who can blame then when they see a 7% gain for Norway's sovereign wealth fund last year, thanks in part to the U.S.?

O'Hara says "sovereigns like the end of day liquidity, giving each day a 'checkmark' look."

So his advice is to "trade with the trend" and not overthink or over-analyze stocks.

via http://ift.tt/2lQuruE Tyler Durden

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