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.
“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.
“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.