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Stock Market Outlook: Record ETF Flows Highlight Robust Risk Appetite

Stock Market Outlook: Record ETF Flows Highlight Robust Risk Appetite

2019-11-11 22:57:00
Peter Hanks, Analyst
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Stock Market Outlook:

  • TLT is an exchange traded fund that seeks to offer a return similar to that of a Treasury Bond with a maturity of more than 20 years
  • Record-setting outflows from the defensive fund suggest some investors are confident in the stock market
  • Still, with stocks trading at all-time highs, traders should monitor their exposure carefully

Stock Market Outlook: Record ETF Flows Highlight Robust Risk Appetite

Bullish equity traders were offered another encouraging sign this week as the defensive TLT ETF registered -$1.2 billion in outflows last week according to data from Bloomberg. While the intraday changes were notable in their own right, the consecutive outflows combined for the fund’s largest weekly loss of funds on record. The abrupt rotation out of TLT suggests investors harbor concerns on the fund’s outlook – a sign bond traders may have changed their tone on the recent equity rally.

S&P 500 Index Price Chart and TLT US Treasuries ETF Fund Flows

Data source: Bloomberg

To be sure, recent Treasury yield price trends have offered a similar view. Resting at just 1.43 at the start of December, the 10-year Treasury yield trades around 1.94 in mid-November, suggesting investor’s outlook for the future has improved. With the Dow Jones, Nasdaq 100 and S&P 500 trading at record highs and the bond market showing signs of recovery, it appears risk appetite has had a marked improvement since just months ago when yield curve inversions were rampant and stocks were rangebound and highly volatile.

Chart of S&P 500 Index Sentiment

Further, IG Client Sentiment data suggests retail traders have been largely absent from the recent rally, with short exposure continuing higher alongside the S&P 500. Retail trader data shows 19.37% of traders are net-long with the ratio of traders short to long at 4.16 to 1. The number of traders net-long is 12.89% lower than Friday and 9.79% higher from last week, while the number of traders net-short is 0.63% lower than Friday and 6.12% lower from last week. Since we typically take a contrarian view to crowd sentiment, the fact traders are net-short the S&P 500 suggests the index may continue to rise.

Despite the bond market’s commentary and current stock valuations, traders should be acutely aware of their risk exposure. Weeks of muted volatility and depressed volume could have allowed investors to become complacent, and the aggressive rotation out of defensive funds like TLT could exacerbate risk aversion when equities inevitably encounter turbulence. While stocks look to continue their rally higher, follow @PeterHanksFX on Twitter for further updates and analysis.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

Read more:Dow Jones, DAX 30 & FTSE 100 Fundamental Forecasts

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