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Hedge Funds Lead Fifth Consecutive Week Of Net U.S. Stock Sales

The bear market in U.S. equities continued last week as investors of all types unloaded them for the fifth week in a row, this time to the tune of $1.5 billion, led by hedge funds, reports Bank of America Merrill Lynch. The firm added that this marked the largest weekly outflow in U.S. stocks since the middle of December as institutional clients and private investors joined hedge funds in the net sales.

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Interestingly, the heavy selling of U.S. stocks among BAML clients came the same week the S&P 500 climbed 1.6%.

Hedge funds, other client types now net sellers year to date

Strategists Jill Carey Hall and Savita Subramanian said that the high level of sales on U.S. stocks put all three client types into the cumulative net seller camp so far year to date. Once again, hedge funds are leading the way.

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They found that net sales of U.S. stocks came mostly among large caps last week, although they add that small cap stocks also witnessed outflows. Meanwhile mid-cap stocks have witnessed inflows in ten of the last 12 weeks and have remained the favorite size category among BAML clients. In fact, Hall and Subramanian said that mid-caps have consistently seen the most buying activity among their firm’s clients “over the last several years” even though they tend to be the most crowded trades and are expensive.

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Additionally, they report that corporate client buybacks spend up last year and now so far this year are tracking higher what they recorded over the same time frame last year.

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Four of ten sectors saw outflows

Looking at the individual sectors, the BAML team reports that exchange-traded funds and Financials and Staples sectors drove last week’s net sales, with Telecommunications and Technology also witnessing outflows. The other six stock sectors racked up bet buying with Consumer Discretionary inflows leading the way. Hall and Subramanian note that it’s common for Consumer Discretionary stocks to benefit from lower oil prices, which is interesting because Energy was the other leader in inflows, although it usually benefits from higher oil prices.

The BAML strategists also report that last week was the first week in three weeks in which their firm’s clients purchased Energy stocks as oil prices rallied, although year to date, the sector has witnessed cumulative net buying, they add. They report that Consumer Discretionary and Health Care each have four consecutive weeks of net buying, tying them for the longest net buying trend currently.

Consumer Staples saw the fifth consecutive week of net selling, giving it the longest net selling streak. Telecom witnessed its first weekly outflow last week, ending its stint as the sector with the longest buying trend. Last week marked the first week of outflows since the latter part of December.

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Private clients shift back to single stock sales

Another trend the BAML team noted in their client flow trend report for last week was a return to single stock sales by private clients. Other than Telecom and Utilities, which both saw net buying last week, private clients sold off single stocks and purchased exchange-traded funds, marking the second consecutive week. The previous weeks year to date, BAML’s private clients bought single stocks but sold ETFs.

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Hedge funds, private clients and institutional investors all sold stocks in the Financials, Staples and Materials sectors, the BAML team reports. None of the ten sectors saw net buying by all three client types. Hedge funds and institutional clients were the most opposed in their activities last week, they add, as hedge funds bought Health Care and Tech stocks while institutional investors sold both sectors.

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Pension fund clients became net buyers of U.S. equities after one week of net sales with purchases being led by ETFs. However, Hall and Subramanian add that pension funds’ buys were spread out across single stocks in seven sectors. The only three sectors which pension funds sold were Industrials, Health Care and Consumer Discretionary.

In related news, RBC Capital states in a flash note today:

–First things first: this is NOT just a short squeeze.  Seeing leadership (sector level) from Fins, Tech and Cons Discretionary—in addition to Materials, Industrials and Energy (which ARE squeezing).  FANG / NOSH, Growth, MF Overweights, High HF Concentration and HF VIP Longs all outperforming, while we also see ‘grabby-ness’ in EEM, along with additional squeezing in ML Most Shorted basket.

Seems clear that net exposures are being taken higher both via long adds and short covers (as the earlier ‘Big Picture’ noted PB flows showing that funds have been fighting this move higher over the past two weeks). This is part of the capitulatory / acknowledgement phase.

 

–Desk notional flows are back above the already very high 20 day average, and are 54% better to buy, with HFs 60% better to buy and MF’s 53% better to buy.  Tech @ 69% to buy, Fins @ 67% to buy, Energy (clear squeeze) @ 84% to buy, while the only sells are in ‘risk off’ / defensive sectors Utes and Metals & Mining.

 

The re-risk is also evident by the mongo sell-off in USTs / Bunds, Gold, VIX (trapped longs) and Yen, along with the remarkable performance within High Yield WTD noted earlier and industrial metals like copper and iron ore.  Re USTs and HY, our ETF team is noting chunky sellside flows out of ITE / IEF / GOVT and into HYG and JNK for the second consecutive day (AJ Kletkin).

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