Last week, I discussed how retail investors have been putting most of their money under the mattress. In 2011, a whopping $932 billion flowed into checking and savings accounts, eight times higher the $117 billion that flowed into stock and bond mutual funds and exchange-traded funds.
Retail pessimism persisted into the New Year. The outflow of $7.1 billion from U.S. equity mutual funds in the week ended January 4 was the biggest weekly outflow since the stock market meltdown in early August 2011.
So who exactly is driving stock prices higher? A wide range of indicators suggest institutional investors are more optimistic now than at any time since the marketís waterfall decline in early August 2011:
Short interest at New York Stock Exchange member firms plunged 10.5% in December to the second-lowest level in the past two years.
Options traders are complacent. The put/call ratio averaged just 0.81 on the past five trading days, the lowest five-day average since July 2011. In addition, the VIXóa measure of the volatility of S&P 500 optionsófell to 20.5 on January 12, the lowest level since July 2011.
Of the hedge funds TrimTabs surveyed in cooperation with BarclayHedge in December 2011, 42% were bullish on the S&P 500, while 30% were bearish. This level of optimism was the highest since July 2011.
Investors Intelligence reports that 51.1% of newsletter writers are bullish, the highest level of optimism since April 2011, when the stock market topped out.
Bank of Americaís survey of global fund managers found that asset allocators are more bullish on U.S. stocks than at any time since April 2010.
Another sign that institutions have been driving stock prices higher is that almost all of the year-to-date gain in U.S. stocks has occurred in overnight futures trading. Needless to say, the retail crowd isnít pumping up stock futures.
So why are institutions so enthusiastic about stocks? We think the main reason is that they expect the Fed to announce another round of money printing. The presidential election is less than a year away, and the Fedówhose leaders are nominated by the Presidentówill be pulling out all the stops to ensure President Obamaís re-election.
The institutional crowd betting on more money printing faces two problems. One is that the Fed does not print as much as it expects. The other is that the Fed prints a lot but that its medicine becomes poison. In other words, the benefits of printing no longer outweigh the costs. At that point, the financial system will be in big trouble. If money printing is no longer a net positive for markets, who will keep the system afloat?
Executive Vice President
TrimTabs Investment Research
Tags: A Random Walk Down Wall Street Beating the Market BLS Bonds Christmas Currency Deficit Double Dip 2011 Economics Economy Efficient Market employment Europe European Debt Crisis Eurozone Gold Gold Bubble Government Spending Holidays Inflation Interest Rates Internet Investing liquidity Liquidity Theory Money Money printing Occupy Wall Street Politics President Recession Santschi Stock Market stock prices Stocks Supply and Demand Trading TrimTabs TrimTabs Investment Research unemployment Wall Street