Learnings and conclusions from this week’s charts:
Tech stock ETF flows recently reached record highs.
Foreign flows into US stocks are surging (record highs).
CEO confidence, ISM PMIs, and freight data are turning up.
Margin debt indicators are sounding a clear risk warning signal.
Much of the index are heading into a buyback blackout window.
Overall, there is a lot of good news on the earnings and economy front as a broader cyclical upturn gets underway. But there are still lingering macro/(geo)political risks and market warning signs that could derail this renewed upturn…
1. Fund Flows — US Equity Funds: first up is a check-in on flows. This chart reminds me of the saying by Sir John Templeton: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria”.
You can clearly observe those phases in the flows cycles in this chart, e.g. outflows throughout the 2020 rally, then frenzied inflows into the 2021 peak, and then outflows again through the beginning of the subsequent bull market.
And now? —looks like fading euphoria.
Source: Topdown Charts Professional
2. Fun Flows — Global: similarly, global investor buying flows into US stocks look to be in the euphoria stage; record highs.
Source: Yardeni via Daily Chartbook
3. Fund Flows — Tech Stocks: tech sector ETFs just recently witnessed their largest inflows ever, and now comprise around 50% of sector ETF assets under management. Investors the world over have a huge amount of confidence in the outlook for US stocks, to put it lightly.
Source: Topdown Charts
4. CEO Confidence: CEOs are also gradually becoming more optimistic on the outlook; this echoes the upturn we’ve seen in the ISM PMIs and global manufacturing PMI reacceleration.
Source: @BlakeMillardCFA
5. Economic Revival? this is also echoed in the Cass freight index data —clear reacceleration seen here. No wonder the Fed opted to kick on with rate hikes, because it’s not just a story about oil spiking inflation; the economy is evidently getting stronger and presenting overheating/inflation upside risks.
Source: McClellan Financial Publications
6. Real Economy Catching-up with Earnings Boom: as noted the ISM PMIs have seen a clear up-shift this year, basically catching up to the previous surge in earnings revisions momentum (which had been heavily tech/AI-driven.
In my view this is basically the boom and bull market broadening out to the real economy and cyclical sectors. I just checked and US earnings ex-tech are also seeing a sharp upswing after a period of stagnation, so the cyclical upturn theme is clearly in play.
Source: Topdown Charts
7. Investment Manager Index: as for investment managers though, the outlook is a bit more complicated than that. Respondents to this survey correctly noted the improving US economic outlook and earnings situation (the first 3 bars in that chart), but are increasingly concerned about fiscal + monetary policy, valuations, and (geo)politics). Strong earnings can take the market far, but those background issues can pile-up and eventually make their weight felt on the market.
Source: Investment Manager Index
8. Margin Call? meanwhile, the margin debt acceleration indicator has now sounded a clear warning signal (which is when it surges, peaks, and rolls over).
Source: Topdown Charts Professional
9. Longer-Term: for the naysayers who claim the above to be cherry-picked based on a short period of history, please see the extended version of that chart below. During the 1960s-80s it also sounded several accurate warning signals. So despite all the good news factors, it is worth exercising caution in light of the background macro risks and flows/positioning risk-flags like this one.
10. Buyback Blackout: in the short-term, we are currently in the middle of peak downside seasonality risks… just as the majority of the S&P500 (SPY) are heading into buyback blackouts. So the dampening effect of buybacks won’t be there to backstop stocks. That playful playbook of a correction and then rally into year-end is seeming somewhat plausible…
Source: Citadel Securities
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