Is the marginal equity buyer back?
Two weeks ago, JPMorgan’s Nikolaos Panigirtzoglou asked the following question:
Has the marginal equity buyer gone?
He was of course referring to the retail bid for stocks. Following the rather dramatic outflows that coincided with the February market turmoil, there was some evidence that Joe E*Trader was set to dive back into markets, but subsequent volatility in equity ETF flows through the end of last month cast some doubt on that assumption.
Panigirtzoglou observed that the disappearance of the retail bid could be problematic considering institutional investors’ readily observable hesitancy to rebuild positions quickly in the wake of the shakeout.
“This improvement was important for the bullish thesis, as it will take some time until momentum improves and vol normalizes inducing institutional investors including CTAs and other trend following investors to start building up long equity positions again,” Panigirtzoglou wrote, before clarifying as following: “In other words, we had hoped that retail investors, perhaps induced by ‘buying the dip’ mentality, were emerging as the marginal buyer of equities.”
Additionally, JPM noted that there seemed to be a dearth of market liquidity which Panigirtzoglou suggested could be exacerbated by “restrictions imposed on off exchange trading and dark pools by MiFID II.”
Well in one section of the latest edition of his popular weekly note “Flows And Liquidity”, Panigirtzoglou revisits all of the above and he’s got what seems like good news.
For one thing, the retail bid is back – and “big league”. To wit:
Equity ETFs saw a very big inflow of $34bn this week (Monday to Thursday). This is by far the highest weekly equity ETF flow ever, driven almost entirely by US equity ETFs.
So there’s that. But perhaps more importantly – or at least for anyone who is concerned about underlying trends that have the potential to make dislocations and acute risk-off episodes worse – liquidity has improved. Here’s Panigirtzoglou again:
At the same time as retail investors have resumed their equity ETF buying, emerging as the marginal buyer of equities again, equity market liquidity appears to have been normalizing also. Figure 2 updates a price to volume based indicator of volatility for the S&P500 Emini futures contract to proxy for market liquidity. This proxy is called the Hui-Heubel liquidity ratio in the academic literature and captures the impact of volumes on prices or market breadth. This liquidity indicator appears to have normalized to before February correction levels.
He goes to observe that institutional investors are still seemingly reluctant to re-risk (as it were), with equity long/short funds’ betas to stocks still depressed, while the same holds true for macro funds and CTAs, with the latter’s betas actually having fallen further.
That said, recall what Marko Kolanovic said in his latest:
Short-term momentum turns positive ~1 month after the initial shock, short-term options expire within a 1-month cycle (gamma rolls off), and realized volatility starts declining prompting volatility sensitive investors to buy.
That suggests that systematic flows should turn into a tailwind sometime soon and when you throw in the buyback bid, it looks like the pieces are all there.
Still, some caution is certainly warranted. After all, Donald Trump is still the President of the United States, something no Excel model has yet figured out how to incorporate and with the political backdrop becoming increasingly fraught just ahead of a Fed hike and a possible upward shift in the median 2018 dot, some of these technical “tailwinds” could easily become “headwinds” (to borrow Jerome Powell’s language).