Buying retail as hedge funds sell is a good sign

  • Retail investors have consistently bought the stock decline, according to Bank of America.
  • As they buy, hedge funds reduce their exposure to the stock market.
  • Some see retail investor trade movements as a contrary indicator, but BofA disagrees.

Retail investors are taking advantage of the more than 10% year-to-date decline in the S&P 500 by buying stocks, according to a Tuesday note from Bank of America.

The bank said its retail clients have been net buyers of equities every week so far this year as the cohort hopes to avoid missing out on the potential for a rebound.

“Retail customers have been more aggressive buyers of this decline than other post-crisis 10% corrections, potentially out of fear of missing out on what has generally been a successful post-crisis strategy,” Bank of America said.

As retail investors buy stocks, hedge funds are reducing their exposure to the stock market, according to the memo. The bank said there had been a record outflow of shares from its hedge fund clients last week as investment firms sought to de-risk their portfolios. amid Russia’s invasion of Ukraine.

For most market participants, the scenario in which retail investors, commonly referred to as “dumb money”, buy and hedge funds, often dubbed “smart money”, sell does not bode well for the economy. future direction of the broader stock market.

But Bank of America found that the investment actions of retail investors actually generated a positive signal for future stock market performance.

“Despite the narrative we’re hearing from some investors that retail is an opposite indicator, our data suggests otherwise,” BofA said.

“S&P 500 returns after the retail inflow period were above average and after-retail returns were below average, with retail flows a slightly better positive indicator than fund flows. speculative,” the note explains.

Since BofA’s retail clients have been the only net buyers of equities since the start of the year, these are the sectors they have bought: communication services, finance and industrials.

Meanwhile, the sectors that saw the most outflows from BofA’s clientele were led by technology and energy stocks, suggesting some investors are taking profits off the table after oil’s historic surge.

In addition to net retail buying so far this year, BofA’s institutional clients have also bought the stock decline in five of the past six weeks, according to the note. It is also a positive signal for future stock market returns, BofA pointed out.

Chart BofA

Bank of America


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