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Hedge Funds, Institutions Biggest U.S. Stock Sellers: BAML

The S&P 500 took a beating last week with a 3.6% decline, and hedge funds and institutional investors (the so called “smart money”) contributed most to that selloff. Last week was the second in a row in which these two types of clients racked up net sales, according to Bank of America Merrill Lynch.

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Fund flows are still defensive

Bank of America Merrill Lynch strategists Jill Carey Hall and Savita Subramanian released the latest edition of their “BofAML Equity Client Flow Trends” report on Tuesday and said that overall, the firm’s clients were net sellers. They note that this trend indicates that defensiveness continues in the markets.

All of their clients together sold $868 million in U.S. stocks last week, with hedge funds being the biggest net sellers. Institutional investors came in second, and private clients were the only net buyers of U.S. stocks last week, which was the second week in a row that they were net buyers of the asset. Private investors dumped U.S. stock throughout the month of October. Pension funds sold stocks for the fourth week in a row with record net sales in Healthcare and near-record sales in the Tech sector leading their sales streak.

Corporate client buybacks increased last week, reaching their highest level in a couple of months, reports the BAML team. They added that the four-week average was tracking higher than the levels observed at the same time last year. Here’s a look at how the different client types stacked up against each other in terms of buying and selling:

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Hedge funds – Stock sales mixed by size

Both large cap and small cap stocks racked up outflows, while midcap stocks recorded inflows. In fact, the BAML team reports that midcap inflows are close to a record high, as they reached the highest level since June and were at the fourth highest level since they started keeping data in 2008. Institutional investors led the way with record net buying in midcaps.

Also last week marked the seventh in a row in which small cap stocks recorded net sales. Hall and Subramanian also reminded investors that small cap outflows earlier this month reached the highest level in the history of their data keeping.

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They also said that the small cap outflows are tracking with the weakening of fundamental data for the overall small cap segment while investors become more and more confident that the U.S. Federal Reserve will increase interest rates next month.

Financials, Industrials pick up

The BAML team found that the biggest net sales clients came in the Tech and Consumer Discretionary sectors. Institutional investors were the biggest net sellers in the Tech sector, while hedge funds led the way in sales in the Consumer Discretionary sector.

Hall and Subramanian also report that exchange-traded funds saw the biggest net buying with private clients leading the way, although inflows were “mostly passive” last week. Following exchange-traded funds, stocks in the Staples and Industrials sectors racked up the next biggest inflows with Industrials buying breaking a nine-week period of selling. Staples’ three consecutive weeks of net buying is the longest net buying streak.

They also found that for the first time in 10 weeks, investors started buying stocks in the Financials and Industrials sectors. They credit rising confidence in an interest rate hike in December for the increased buying in the Financials sector. At 10 weeks now, the Materials sector still has the longest net selling streak.

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But despite these inflows, BAML notes that overall flows are still on the defensive, as they have been since the second half of August. The firm’s strategists believe that clients are still unconvinced that next year will bring a pickup in growth.

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All graphs and charts in this article are courtesy Bank of America Merrill Lynch.