As we do in most Wednesday night Closers, last night we highlighted weekly ICI data on mutual fund flows in addition to ETF flows.  Flows for domestic mutual fund flows have been extremely weak lately showing modestly bearish sentiment from retail traders. But as the major indices have approached new all-time highs, ETF investors have become more aggressive on the bullish side.  ETF flows are showing the opposite of mutual fund flows, with inflows at the highest since the very start of 2019 across international and domestic funds combined and the strongest since early 2018 for domestic funds only.  Altogether, investors are certainly buying into the rally though not by an extreme degree yet, as shown in the charts below. Start a two-week free trial to Bespoke Premium to access our interactive economic indicators monitor and much more.

Overall, domestic non-institutional investors who are captured by fund flows like these appear to be pretty optimistic about the outlook. Domestic equity inflows were only this large right at the end of 2016 and 2018, immediately following the US election and presaging the volatility product blow-up at the end of 2018. In the tables below, we show mutual fund flows by type including the percentile of all periods and forward returns for similar scenarios. As shown, equity mutual funds inflows have been very weak while bond funds have seen massive inflows.  Looking forward, when flows have seen similar readings the S&P 500 has a slight positive bias in the following month though there are some mixed results.

With mutual fund flows and ETF flows somewhat conflicting with a bit of a positive bias, tones out of other indicators are confirmed.  As we mentioned in an earlier post, neutral sentiment (investors reporting no anticipated change over the next six months) as seen through the weekly AAII survey has been very elevated since the 2018 sell-off and typically has been the most popular opinion among investors in this time.  At its current level, it is over one standard deviation above the historical average for neutral sentiment.  At the same time, bearish sentiment has come in very low at just above 20%, which is just over one standard deviation below the historical average for the percentage of investors reporting as bearish.   This was only the 13th time in the history of the data that both neutral and bearish sentiment have simultaneously come in with these sorts of extreme readings. Looking forward, just like with the fund flows, the S&P 500 has a bit of positive bias in performance—though the next week often sees declines—with an average gain of over 1.3% one month out. Overall, between fund flows and sentiment surveys, investors seem to be modestly bullish on the current rally.

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