Market sentiment likely to change when the tsunami of equity inflows run out

Mathan Somasundaram

Deep Data Analytics

The local market delivered a choppy negative day on very low turnover. We have started the sixth consecutive week without a double-digit billion-dollar turnover day. The market started slight negative and trended lower through the day despite some volatility. Apart from global macro trades, retail investors were the only game in town. Local fund managers are waiting to see US Fed commentary and local inflation data before making any major moves. Miners and property were the only green zones while utilities and staples were the worst hit. Banks and energy started the day positive and then rolled into negative territory as the day went on. Sentiment in Asian markets was undecided and moved into profit taking as the day went on.

US Markets have been held out longer than expected due to boost from equity inflows, buybacks and margin lending. The equity inflows show that the last 5 months of aggregate inflows were higher than the last 12 years of aggregate inflows. This tsunami of inflows continues to extend an overstretched market despite reflation and pandemic waves. How long can this be maintained? We are just coming off all-time high weekly inflows. It could get messy when the tap gets turned off. Time will tell.

Relative annual returns of different size categories clearly show that index fund managers benefited about 15% outperformance by being in small-caps, while small-cap fund managers benefited about 60% outperformance by being in micro-caps. 

Index funds too heavily weighted in small-caps, and small-cap funds with too many micro-caps are all carrying more risk than they were supposed to, but that is exactly what happens in this part of the cycle. Going down the size category in a bull market is the usual historical trend as everyone chase outperformance but be aware that it is a knife that cuts both ways. When the market rolls over, small to micro caps with see their liquidity disappear and they will fall much more than the market. There is nothing for free. High return brings high risk. Understand your risk exposures and manage it or the market has a way of teaching tough lessons to investors.

Comments on US market last close… 

US market finished the rock and roll week higher on the day but slightly lower for the week on most index. RUSSELL +1.76%, NASDAQ +1.44%, S&P +1.09% and DOW +0.67%. Bonds flat, USD lower, Gold ticked lower, copper and oil higher. Economic data is getting better with stimulus and so is the worry about inflation and tax hikes to pay for it. Pandemic waves are still running through major regions of the world while vaccine rollout is running into supply and ideological issues. Market continues to ignore bad news and take good news in a stretched optimistic sentiment while reporting season delivers solid updates as expected. Banks and Tech lead today while Utilities and Staples were laggards. We are going into the last week of the month and everyone should be back at work after holidays. We should get more clarity on tax changes over the next few weeks. Volatility and turnover are too low and that won’t last too long.

Full SUNSET STRIP report with end of day market stats are on the attached link.

(VIEW LINK)

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Mathan Somasundaram
Founder & CEO
Deep Data Analytics

Over 25 years’ experience in the finance/tech industry. Mathan has worked extensively in all parts of the finance sector (i.e. County NatWest, Citi, LIM, Southern Cross, Bell Potter, Baillieu Holst and Blue Ocean Equities). Currently Founder and...

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