Investors Favor Large-Caps Over Small-Caps – Weekly ETF Fund Flows
Last week was a mixed bag for stocks.
After finishing the previous week at an all-time high of 1,985, the S&P 500 drifted lower throughout the week. The large cap index dropped 18 points to finish the week down about 1% off the highs.
The mild pullback was cheered by the bears. Many of the talking heads took to the airwaves to warn people that stocks were overvalued and a “major correction was imminent”.
But ETF fund flows didn’t confirm the doom and gloom these talking heads were spewing. In fact, we saw nearly $4 billion flood into US listed ETFs last week.
As you know, fund flows are a valuable indicator of what traders are thinking. It takes a lot of buying or selling to drive millions or even billions of dollars into or out of individual ETFs.
Fund flows are something traders use to find trends and gauge investor sentiment. And it can help you pinpoint which ETFs could be next to make a big move higher or lower.
The SPDR S&P 500 (SPY) captured the largest inflows last week. SPY had over $4 billion in net inflows last week as investors added exposure to US large cap stocks.
Needless to say, there are plenty of investors who believe stocks have more upside when there are huge inflows like the ones we just saw.
And for good reason…
There are four main reasons investors are bullish… the economy is improving, interest rates are low, corporate earnings are strong, and stock buybacks are expanding.
As long as these four elements remain strong, investors will be hard pressed to not be invested in stocks.
After all, major stock market corrections happen for a reason. The simply don’t suffer a major correction because the valuations are too high.
That’s not to say stocks won’t go through a short term correction or pullback. But the major 10% to 20% correction that some are calling for just won’t happen without one of these four elements changing.
The weakest link in last week’s fund flows was the iShares Russell 2000 (IWM). It had $1.7 billion in net outflows last week.
It was a sharp reversal from the previous week when IWM enjoyed the largest inflow of new capital. IWM had net inflows of more than $2 billion in the previous week.
It looks like a lot of ‘hot money’ is moving in and out of the US small-cap ETF.
After falling more than 10% from the March high to the May low, IWM had recouped all of the losses by July 1st. But IWM failed to breakout above the March high. And the quick selloff last week forced the weaker hands to hit the sell button.
Here’s the thing…
IWM appears to be forming a cup-with-handle chart pattern. Those of us that follow charts know this a bullish technical setup.
Right now IWM is forming the ‘handle’ of the chart pattern. If IWM breaks out to a new high over the next few weeks, we could see IWM make a big move to the upside in short order.
For now, investors are favoring large cap stocks over small cap stocks. However, if IWM completes the bullish cup-with-handle pattern, we could see small caps quickly regain favor with investors.
That wraps up this week’s ETF fund flows…
Keep in mind, there’s a lot of information about ETF fund flows. And it can be a very useful tool as long as you know what you’re looking for.
Good Investing,
Corey Williams
Category: ETFs, Market Analysis
