The idiom may be “sell in May and go away,” but the sales of U.S. stocks have continued into June. Institutional investors led a broader trend of sales among Bank of America Merrill Lynch clients, although pension funds flip-flopped and started buying equities. After selling Tech stocks for three weeks, hedge funds were buying Tech, running counter to other types of investors, and BAML warns that all that buying could switch to selling because of positioning.
Institutional investors lead the selling, while hedge funds were buying tech stocks
In their “Equity Client Flow Trends” report dated June 20, BAML strategists Jill Carey Hall and Savita Subramanian outlined inflows and outflows among their firm’s clients the week before. The S&P 500 rose only 0.1% that week, which was also the second consecutive week that BAML clients were net sellers of U.S. equities as single stock sales offset ETF purchases.
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Year-to-date inflows to exchange-traded funds were already higher than they were for all of 2016, and we haven’t even reached the halfway mark for 2017. Further, they highlighted that single-stock net sales for this year are half of the record levels set last year.
BAML clients racked up $460 billion in net sales, although that was less than the amount they sold the previous week.
The strategists added that institutional clients led all the selling after buying equities the previous two weeks. Private clients were net buyers of stocks for the second week in a row, and hedge funds started buying stocks after unloading them for three weeks.
BAML clients bought mid-cap stocks but sold large- and small-cap stocks. Meanwhile, buybacks slowed down for the fourth week in a row and remain below usual June levels in the wake of a busy May. However, on a year-to-date basis, share buybacks are still at their lowest level in four years.
Hedge funds were buying Tech stocks
Hall and Subramanian report that their firm’s clients were buying Tech stocks, taking advantage in the broad-based dip in the sector two weeks after nearly setting a new record for sales of Tech stocks. However, they add that the Tech buying was not broad-based like it was two weeks before. They clarified that hedge funds were buying Tech stocks in a big way after selling them the three weeks before that. In fact, they were buying Tech stocks so much that it was the second-biggest inflow into the sector by hedge funds since BAML started keeping data in 2008.
Meanwhile, institutional and private clients continued to unload Tech stocks, and the BAML team warns that mutual funds’ “extreme overweight” positioning in the sector presents a major risk for it. The end of the second quarter is approaching rapidly, and mutual funds often rebalance their portfolios toward the end of the quarter.
Investors search for yield
BAML clients also bought Telecom and Real Estate, both of which are classified as yield sectors, and Industrials.
However, they were selling stocks in the other sectors, with Health Care being the most-shunned sector among the firm’s clients. Hall and Subramanian said that net sales of Health Care stocks were the eighth highest in the history of their data. Further, the four-week average flows for Health Care have been negative since March 2016. Sales of Financials were at the highest level in 15 months even though the Fed hiked interest rates and has taken up a more hawkish tone this month.
A focus on Telecom
They add that Telecom was the only sector with cumulative single-stock inflows so far this year. CFRA Investment Strategist Lindsey Bell also referenced Telecom stocks in a note dated June 15. She noted that the sector is usually a favorite of investors whenever they’re looking for yield or defensive exposure. However, this year has been an unusual one for Telecom, as the sector hasn’t performed as well as other high-yield defensive sectors. Telecom was lagging the S&P 500 at that time, falling 9.6% while Utilities and Consumer Staples were rising.
She explained that competition fears weighed on Telecom even though the sector’s dividend yields were the highest of the S&P 500 at 4.9%. But things could be switching around for Telecom, as the BAML team said that the sector was the only one that recorded net buying by all three client types. Bell’s note was released the same week BAML picked up net buying of Telecom stocks by its clients. She suggested that a buying opportunity for Telecom may have begun on May 17 because historically, the sector’s yield has peaked within 50 basis points of the 5% threshold. And in each of the four times it has peaked since 2012, it signaled a buying opportunity.