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There is always some news or major development that can influence the direction of financial markets at any given time. In the end, it’s really inflows and outflows that determine the direction of financial markets. If there are large outflows of funds, it means there is more selling pressure than the number of buyers can stop. If there are far more buyers (inflows) than sellers (outflows), then stocks should rise. It seems simple enough on the surface. That said, emotions, fear and greed, and other factors all come into play when it comes to influencing the ultimate direction of financial markets.

BofA Merrill Lynch has released its client fund flow trends for late in November, a time when the equity markets have hit all-time highs, signaling that clients are no longer buying the market wholesale. While retail clients have returned to net buying after seven weeks of selling, the Merrill Lynch client base was shown to be net sellers of U.S. equities after buying for two weeks. The flows report showed that clients bought individual stocks but were larger sellers of exchange-traded funds for the first time in ten weeks.

The report further showed that hedge funds were net sellers for the third straight week. Institutional clients were net sellers for the first time in 3 weeks, while private clients were net buyers for the first time in 7 weeks.

Another observation was made that corporate buybacks decelerated last week as earnings wound down, but the firm showed that cumulative buybacks were still up 27% year-to-date versus this same time in 2018.

The firm pointed towards continued cyclical outflows with defensive inflows. There were 7 of the 11 sectors where clients were net buyers — led by financials and discretionary, with the discretionary sector seeing net buying from hedge funds, institutional clients and from retail clients). All three major groups were sellers of industrial stocks. Discounting share repurchase funds, defensive sectors continued to see net inflows from cyclicals for 4 weeks in a row.

Additional flow data were shown as follows:

• Outflows from equity ETFs last week were driven almost entirely by sales of largecap/blend ETFs by hedge funds, whose ETF sales were the largest in 3 months.
• Growth and Value ETFs saw inflows for the sixth and 11th straight weeks, respectively.
• Growth ETFs have seen much larger cumulative inflows YTD and Value ETFs have seen bigger inflows over the past 2 months.
• A sustained value rotation will continue as macro data shows more signs of bottoming out.
• The biggest inflows were seen in real estate, technology and even in energy ETFs. The biggest outflows were seen in utilities ETFs.

The report further said:

With the market at all-time highs, clients are no longer buying the market wholesale – 4-week average flows into broad market ETFs have been close to zero/slightly negative most weeks since September versus more consistent inflows into both size and style ETFs over the same period. We similarly view the biggest opportunities as taking advantage of tactical rotations within the market.

Inflows and outflows are only part of the big picture and it’s one thing to look backwards. The real takeaway is how inflows and outflows will impact the markets ahead.