Selling The Stock Rally, Buying ETFs On The Rocket Ride

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The S&P 500 had its first perfect week in almost two decades last week after closing at a record high every day. The Dow Jones Industrial Average also touched record highs every day last week, although it wasn’t the first week this year the benchmark did that. Both benchmarks are off to a roaring start again this week with no signs that this rocket ride to the moon will end any time soon, but many investors are taking advantage of this never-ending stock rally and selling it.

Bank of America Merrill Lynch strategists Jill Carey Hall and Savita Subramanian said in a note last week that their firm’s clients continue to be big sellers of the stock rally. Institutional clients and hedge funds led the fourth week of net sales among their firm’s clients. Funds flowed out of single stocks in large chunks, offsetting smaller net buys of exchange-traded funds. The result was $1.7 billion in overall net sales among their clients.

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Buying Health Care in the stock rally

Institutional clients remained the biggest sellers after unloading U.S. equities for eight consecutive weeks. Hedge funds sold U.S. stocks for their sixth consecutive week, although their sales were on a much smaller scale. As institutional clients and hedge funds unloaded on the stock rally, private clients were net buyers and have been rather consistently over the last month and a half. However, flows continued to be into passive investments as those purchases were done almost entirely through exchange-traded funds.

The BAML team said their firm's clients were still ETF buyers but single-stock sellers on a broad base. Health Care was the only sector that saw inflows to single stocks that week, a major shift because it was the first time the sector recorded net buying in 11 weeks.

stock rally

As the third-quarter earnings reporting period began, BAML clients sold stocks in the Industrials, Discretionary and Financials sectors the most. In fact, Industrials sales held close to record highs, which built on the record outflows from the previous week. Institutional and retail clients led those sales. BAML clients also unloaded Telecom stocks during the stock rally with sales close to record highs due to warnings about subscriber losses at one of them.

ETFs run opposite of single stocks

The BAML team also reported that ETF flow momentum continued in Tech and Financials. While Health Care was the only sector to record net buying that week in single stocks, Health Care ETFs racked up the highest net sales as hedge funds and institutional clients led the sales.

stock rally

Interestingly, Tech ETFs recorded the biggest inflows that week for the seventh consecutive week of buying for Tech ETFs. After Tech, Financials had the second-longest buying streak among ETFs with five consecutive weeks of buying. Tech was the only sector in which all three client types (institutional, hedge funds and private clients) bought ETFs.

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