Man-oh-man, three-day weekends blast right by. I mean I get all relaxed and the next thing I know I am watching the market flow and typing away. Oh! Speaking of that, watching the market flow, that is, it is off to a big start this morning. The S&P is pushing higher into record territory and the Dow is closing in on its record set back in the spring of, well, actually earlier this month.

I had a feeling at the end of last week investors were ready to settle down and get back to work, and so they are, or so it seems as of Friday and as of this morning.  

  • Whatever investors are worried about right now, those concerns are not showing up in Wall Street’s fear gauge. The CBOE Volatility Index or VIX closed on Friday at 11.36, its lowest level since March 2013.

Many argue that the VIX so low shows complacency among investors, and that might well be the case, as the past weeks have not seen the bulls pushing hard to get where they are this morning, but now they are here. After the last few weeks of the breathless media pushing fear, I find it remarkable that complacent bulls hung in there to protect the market from the uncommitted bears.

  • Investors in U.S.-based funds pulled $7.6 billion out of stock funds in the week ended May 21 on weak U.S. economic data and disappointing corporate results.

The above might seem scary, as the headline and lead of the Reuter’s article suggests, but, as always, the lead in journalism is not always the story anymore. Often it is buried.

  • All of the outflows stemmed from stock exchange-traded funds, which posted $9.6 billion in withdrawals, while stock mutual funds attracted $2 billion in net inflows, which were the biggest in four weeks. The net outflows were the biggest since February.

There it is. The story is not that hedge funds pulled money from highly volatile and highly traded ETFs, and it’s not the story that they did so because they are in fear, which they are prone to be.

  • The outflows from stock ETFs could speak to a lack of confidence in the U.S. economy and worries about a correction in U.S. stocks.

No, the lagging information just reported reflects the complacency of the bulls amidst the fear of the last weeks and the now burgeoning willingness to take on more risk.

Yes, the small-cap sell-off and the flight from the high flyer stocks has been playing out for some weeks now, and that has kept the bulls at bay, but, alluding to the great Paul Harvey, here is “the rest of the story.”  

  • The latest week showed investors putting cash to work. Low-risk money market funds, which are viewed as a safe place to store cash, posted $10.1 billion in outflows, marking their biggest outflows in five weeks.

That $10.1 billion outflow from money-market funds is just barely larger than the $9.6 billion outflow from ETFs, and in that money flow swap, is an interesting story.  

Do you remember the panic about the emerging markets earlier this year, you know, when the breathless media pounded the idea that the Fed’s withdrawal from its bond-buying program would sink emerging markets? Well, guess what …

  • Emerging market stock funds attracted $1.5 billion in inflows, their highest inflows in six weeks and their ninth straight week of inflows.

Money is flowing out of ETFs, the trading venue of hedge funds, true, but it is moving from there to mutual funds (equity based) and bonds. Not just any bonds, though; it is moving into higher risk bonds.

  • Taxable bond funds attracted $3.4 billion in new cash, marking their 11th straight week of net inflows.
  • Riskier high-yield bond funds attracted $744 million, marking their biggest inflows since February.

The above suggests investors are expressing confidence in risk, which is a far cry from the idea that money is flowing away from risk because of “weak US economic data” and “disappointing corporate results,” neither of which is true. US economic data has been mixed, as it always is, but overall, given employment, housing, and manufacturing/services data, it is a stretch to call it weak and corporate results were on par and above average in some areas.

Even though Friday and today speak to a market wanting to break out, and showing strong signs of doing so, the breathless media will still pound the drums of discontent, if for no other reason than bad sells better than good. Now, you have the rest of the story, at least for this Monday, anyway.  

Trade in the day; invest in your life …

Trader Ed