One of the maxims in this business is “Follow the money.” One cannot do this on a general basis, meaning the “money’ is not a singular entity that moves from here to there. Market money flows much like tributaries from a major river, away from the source in varied directions, eventually adding to a body of water. And sometimes that flow tells a larger story market players need to understand, a story that gives clues about the psychology of the market, clues as to what the market is thinking, as well as a tipoff about where to put our money or not put our money.
- Opus, a major commodity hedge fund, is winding down, recalling its investment in remaining funds and returning capital to investors, citing a challenging market for commodities.
The above is more evidence that the money is flowing out of commodities, a major source of play for traders and investors. Market money is also like water in that is has to go somewhere; it doesn’t just disappear as it flows away from the river. True, water can evaporate or soak into the earth, but in both cases, it does not go away. It returns either as rain or it ends up in an aquifer. It is the same for market money.
The money flowing out of commodities could end up in cash in the bank for some or it could be the summer vacation with the “fam” for others, but given the reality of those who invest in commodities, it is likely the money will end up working somewhere else, somewhere with a rate of return closer to what aggressive investors like. The question is where will the money flow go?
- Funds that specialize in emerging market bonds attracted $331.5 million, marking their third straight week of inflows.
The above is interesting in that it was not too long ago that money was flowing out of the emerging market. Remember the breathless media’s panic-driving news about that coming calamity? In any case, money is flowing into those bonds, which does not particularly help the equities market, yet it does to speak to more risk taking, a clue about market psychology.
- Yields on municipal debt fell to 2.325% this past Wednesday – their lowest in almost a year.
Money is flowing into “munis,” another tributary flowing into a larger body of water (bonds). The story here and with the aforementioned money flow into emerging market bonds is that investors are putting at least some of the money coming out of commodities into longer-term bonds with a lower rate of return.
This speaks to a fear about the equity market, perhaps that it is setting up for a fall. Given the recent chatter about the diverging direction between small and large cap stocks, as well as the blather about an overvalued market and the never-ending bull run (over five years now), no wonder some folks are giving into the certain, even if the certain means a low rate of return.
- Stock mutual funds attracted $388 million in new cash, marking the smallest inflow in six weeks, while stock exchange-traded funds attracted $1.6 billion.
The above suggests investors are taking less risk with equities in general, but more risk with ETFs, which are, in effect, equities. The money here is seeking a higher return with more volatility. This probably relates to the reality that the last two months in the market have seen market movement within a narrow range, up and down, unable to break through the ceiling or the floor, until this past week, that is.
The S&P and the Dow are now trading in a higher range, a range bound on the top by record levels. As well, the Russell 2000 is seeing more green and the NASDQ has been flowing uphill the last week and for the last month. True, volume is light, but it still takes money to drive up the market, and yet …
- Commodities and precious metals funds, which mainly invest in gold futures, attracted $368 million in inflows, marking their first inflows in nine weeks, despite spot gold posting its biggest daily fall since mid-December on May 27.
Okay, so the story remains that money is flowing into the market, but what does the above suggest? What is the clue about the market’s psychology? Given that gold is down again today and given that a plethora of stories abound in the financial media about the demise of gold, I would not read too much into this money flow. I would not follow this money.
With today’s ISM manufacturing and the ISM non-manufacturing numbers coming out positively, and the VIX still holding around 12, I contend the story remains the same – there is little fear in the market, so it will keep pushing higher inch by inch and while doing so, it will fall back an inch or two here and there. In other words, the market will keep trading in a range only the range will be higher.
- Tesla is making progress on developing self-driving technology for its cars, and added he was confident that within a year, the automotive industry will allow drivers to go from highway on-ramp to exit without touching any vehicle controls.
Seriously? Just when I dismissed the idea of fear in the market, I have to deal with this stupid idea of cars without drivers in control of their cars?
Trade in the day; invest in your life …
