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Why is the big money dumping stocks?

Lawrence Lewitinn
Talking Numbers

Big money managers may be doing something the retail investors aren’t – pulling money out of the market.

Last week, investors added $379 million into equity mutual funds (the kind that’s popular with retail investors) according to Thomson Reuters' Lipper. At the same time, exchange-traded funds focusing on equities – the kind of securities traded by institutional investors – saw a whopping $7.97 billion in outflows. That’s the biggest outflow seen since February, around the time the Dow Jones Industrial Average dropped 5 percent from its then highs.

According to Gina Sanchez, founder of Chantico Global, investors should pay close attention to what the institutional investors are doing.

(Read: Stocks close lower, Dow posts biggest weekly decline in 7 weeks)

“Follow institutional flows first,” Sanchezsaid. “Institutional money will flow out, the market will then start to correct, and then mutual fund money – or retail money – will then follow and then compound that correction.”

Retail investors are at the tail-end of dumping the stocks, said Sanchez, a CNBC contributor. “When you start to see institutional investors pulling out, they tend to be a little more nimble and a little more ahead of the curve than mutual funds and retail investors,” she said. “This is a moment where everybody needs to sit up and take note.”

Ari Wald, head of technical analysis at Oppenheimer & Co., believes there’s nuance to the data on mutual fund and ETF flows.

(Read: Goldman, other economists shave Q2 GDP expectations)

“I just don’t know if the institutional money is actually moving out of equities at this point,” Wald said. “What I see is retail money just getting into equities. Retail investors are selling mutual funds. How we see it, they’re the ones who are buying ETFs. If we have had a little bit of a weekly outflow out of ETFs that’s really just a needle in the haystack of what’s been massive inflows that just started at the start of 2013.”

Data from the Investment Company Institute show almost $328 billion in inflows from January 2013 until the end of May 2014. 

In the meantime, Wald sees the Dow as a near-term sell but relative to the other broad market benchmark, the S&P 500.

“We want to sell the relatively weaker stocks, and we see a lot of them in the Dow Jones Industrial Average,” Wald said. “You see the Dow Jones out to new all-time highs but it actually has been trending lower versus the S&P 500 for years now.”

“I would be selling the Dow Jones Industrials here looking to buy the S&P 500 on a pullback,” Wald added.

To see the full discussion on the Dow Jones Industrial Average, with Sanchez on the fundamentals and Wald on the technicals, watch the above video.