Another View of What’s Driving Market Melt-Up: Hedge Funds and Buybacks

  • Individual investors were net sellers in BofA’s client survey
  • Managers seen putting cash to work after selling in December
UBS Head of Global EM Strategy Geoffrey Dennis says strong earnings are driving the market rally.

Everyone says the little guy is driving the New Year’s rally in American stocks. But is he?

With equity holdings hitting records at one online broker and consumer sentiment heading skyward, pundits have been quick to identify individual investors as the big buyers. However, according to data compiled by Bank of America Corp. on its clients’ flows, the biggest source of demand is still the oldest source of demand: companies themselves and hedge funds.

In fact, individual investors, along with institutions tied to individuals such as pension funds, were net sellers during the first week of 2018.

In other words, retail investors -- portrayed by some as a necessary ingredient in the market’s euphoric phase -- may not be quite so enamored with stocks as is generally believed. Over the last five weeks, their actions have alternated between buying and selling, client data from BofA show.

While predictions abound that stocks are in the midst of a climatic surge sometimes known as a melt-up, demand statistics paint a less extreme picture. Corporate buybacks are actually off to a slow start this year, with the amount of repurchased stocks sitting at about half the average of the previous four weeks, data compiled by BofA show. And even though they’re the biggest buyer among clients, hedge funds only dove in after shunning stocks in the previous two weeks.

Source: FBN Securities

To JC O’Hara, a technical analyst at FBN Securities Inc., the rally that pushed the S&P 500 Index to six straight highs this year is nothing more than a snapback after investors retreated from the market in December. The evidence? While the gauge was up last month, all the gains came during night sessions, a sign that U.S. investors were paring back holdings during local trading.

“Managers locked in profits as they sold during the day in December,” O’Hara wrote in a note dated Tuesday. “Now they have cash to deploy!”

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