U.S. Stock Inflows of $23 Billion at Stake as VIX Increases 34%

Aug 04, 2014 3:12 pm ET

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Aug. 4 (Bloomberg) -- The five-year rally that has almost tripled the value of the Standard & Poor’s 500 Index keeps pulling in investors even as signs of strain spread.

About $23 billion has flowed in U.S. equity exchange-traded funds in the past two months, according to data compiled by Bloomberg. The SPDR S&P 500 ETF Trust absorbed $6.5 billion last week, the most since December, even as the underlying gauge slid 2.7 percent and the Chicago Board Options Exchange Volatility Index, a measure of market anxiety, surged 34 percent.

While individuals are becoming more bullish as growth in profits and the economy accelerate, Wall Street is waving a flag of caution. Goldman Sachs Group Inc. said in July that equities are at risk of a temporary selloff and Raymond James Financial Inc. told clients to wait out the selling. Stocks will have a “significant correction” at some point, Alan Greenspan said last week.

“People tend to come in when they’re most optimistic about the market and that’s often when the market hits a short-term peak,” Bruce McCain, who helps oversee more than $25 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland, said by phone. “It’s not an easy environment out there.”

Stocks Tumble

The S&P 500 slid 2.7 percent last week for its biggest retreat since 2012. Companies from Exxon Mobil Corp. to Samsung Electronics Co. reported results that disappointed investors, Argentina defaulted and Portuguese securities regulators suspended trading in Banco Espirito Santo SA shares amid a 73 percent slide.

The VIX, referred to as a “fear gauge” because it usually moves in the opposite direction as the S&P 500, jumped 34 percent to 17.03 last week. Investors own four options betting on a rise in the volatility index for each wagering on a decline, the highest call-to-put ratio since February 2007, according to data compiled by Bloomberg.

While purchasing stocks right after a drop has been a good way to make money this year, many professional investors are saying the recent string of losses may get worse. It’s been almost two years since the S&P 500 had a 10 percent retreat and the calls for it to happen now are getting louder.

Market ‘Hiccup’

“Our call had been to experience a five to 10 percent correction over the summer months and this is playing out,” Phil Orlando, chief equity market strategist at Federated Investors Inc. in New York, said in a phone interview. He helps oversee about $400 billion. “Investors know these summer months that the market is primed for a hiccup.”

Jeffrey Saut, chief investment strategist at Raymond James, has said equities may fall as much as 12 percent and recommended selling some stocks and raising cash. The underperformance of small-cap shares even after the drop at the end of last week was a bad sign, he wrote in a note Aug. 1.

“Surely that has been the correct strategy, ‘buy the dips,’ for the past two years, however this time feels different,” he said.

Goldman Sachs cut its rating on stocks to neutral, the equivalent of hold, for the next three months, according to a July report from its portfolio strategy group. Leuthold Group LLC’s Douglas Ramsey said last month that he’s expecting an 8 to 10 percent pullback in the equity market over the next couple of months.

Buying Opportunity

“We see this as a possible beginning of a correction,” said Espen Furnes, who helps oversee about $85 billion at Storebrand Asset Management in Oslo. “Our clients are pretty confident in the earnings recovery, so any major correction will be regarded as a buying opportunity.”

After mostly missing the first four years of the bull market that started in 2009, individuals are proving as stubborn about pulling out of the market. While the buying shows demand for equities is strong, it’s no guarantee prices will rise, said John Manley of Wells Fargo Funds Management.

The SPDR S&P 500 ETF Trust took in $6.1 billion July 30, the most since September 2011, according to data compiled by Bloomberg. Investors pulled out about $1.1 billion at the end of the week.

“Buyers of ETFs have gotten a little bit more positive and comfortable with the market, but it needs to be put into context,” Manley, who helps oversee about $233 billion as chief equity strategist for Wells Fargo Funds Management in New York, said in a phone interview. “These flows don’t necessarily mean the broader equity market is going to move a specific way. There’s no lockstep pattern in this.”

‘Still Bullish’

For most of this year, equity investors have seen little volatility and steady gains, giving them confidence to put money back into the market. About $100 billion has been added to equity mutual funds and ETFs in the past year, 10 times more than the previous 12 months, according to data compiled by Bloomberg and the Investment Company Institute.

For Anthony Valeri, a market strategist with LPL Financial Corp., stocks will eventually recoup these losses because the U.S. economy is still healthy with rising corporate earnings and takeovers becoming more common. Profits in the S&P 500 have increased 10 percent so far this earnings season, the most since 2011, data compiled by Bloomberg show.

“People feel better about investing in stocks over other asset classes,” Valeri said in a phone interview from San Diego. “Most investors are still bullish.”

--With assistance from Jacob Barach in New York, Eric Lam in Toronto and Namitha Jagadeesh in London.