Traders May "Sell The Inauguration" But BofA Is Not Calling For "A Big Short" Yet

Along with most of his Wall Street peers, BofA"s Chief Investment Strategist Michael Hartnett flipped his outlook on risk assets shortly after the election, turning from quietly bearish to vocally bullish and forecasting a substantial rise in US equities, and even more substantial bounce for Japanese, European and UK stocks as well as oil.

So far, Hartnett has been correct, and according to recent fund flows, much of the investing community agrees.

Some specifics: in the last week, according to EPFR, there were both strong bond inflows ($6.3bn) as well as equity inflows ($5.5bn) offset by modest commodity outflows ($0.2bn). Curiously, unlike in the earlier part of the reflation trade when buying of equities was funding from bond liquidations, last week we saw the strongest week of bond inflows in 3 months, which followed $41.5bn of redemptions in past 8-weeks - the largest redemptions since taper tantrum.

A more nuanced look into bond flows shows that investors added risk, with another week of redemptions from Treasuries but 1st inflows to EM debt funds in 9 weeks, 2nd week of renewed inflows to IG bond funds, and 6th consecutive week of inflows to HY bond funds. In other words, "risk proxies" in the bond world are getting hot again.

Perhaps nowhere is this more obvious than what is going on in the primary issuance market. Here, as Bloomberg notes, debt sales are blowing through all records, with the biggest volumes of issuance ever for the first week of January, as top-rated U.S. companies are selling bonds at the fastest pace ever to start a year

And while gold & EM equities remained shunned, which gold posting an 8th consecutive week of outflows, the longest outflow streak in 3 years, as well as European & EM equities, which are largely ignored by investors, US equities remain quite hospitable, attracting $5.5 billion in new funds in the past week. By sector, EPFr notes that there were 15 straight weeks of financials inflows ($0.8bn); first inflows to REITs in 9 weeks ($0.7bn); 6 straight weeks of healthcare outflows ($0.2bn)  Sadly for the active management community, there was more bad news as ETFs attracted $9.2 billion in the first week of the year, offset by $3.7 billion in long-only fund outflows.

In fact, as the chart below shows, the amount of funds that has flowed into US equities is starting to be of concern to some analysts who see in this unprecedented inflow signs of euphoria.

In a report last week, TrimTabs Investment Research also noted this unprecedented fund flow euphoria when it reported that U.S. equity ETFs issued a record $59.9 billion in December, easily surpassing the previous record of $50.7 billion in November.

So after this unprecedented deluge in new funds chasing stocks, where are we now? According to Hartnett, there are two answers: a tactical and a structural one:

Tactically: a wobble in risk assets would be no surprise in coming weeks; traders looking to play a pullback (on “sell the inauguration” or “here comes the Fed” or “CNY-reversal” themes) should note since US election the big inflows (and pullback risks) concentrated in US stocks, financials, bank loans, US value stocks, High Yield (see Chart 1); in contrast, EM, US growth stocks, Treasuries, Gold & IG have less vulnerability to profit-taking.

As a reminder, it was Morgan Stanley"s chief equity strategist Adam Parker who last week called to fade the Trump rally and "Sell the Inauguration" as "the world has materially changed". On Friday, none other than Wall Street"s most famous permabull Tom Lee suddenly became its biggest bear when he said the S&P would like slide to 2,150 by June 30, before rebounding modestly to 2,275, ending the year largely unchanged.

Hartnett disagrees because while he notes that a tactical selloff may come, "structurally" the rally will continue.

Structurally: we remain bullish risk in coming quarters (expecting double digits for Japan, Europe, UK stocks, and oil; single digits for US stocks, commodities, the USD & Emerging Markets; low/negative returns for corporate & government bonds).

What would change his mind? Even more euphoria: "We will wait for unambiguous signs of bullish investor Positioning, bullish Profit expectations & hawkish Policy from Fed/ECB, as well as outperformance from laggard risk assets in 2016 (e.g. Europe/UK – Table 1) before calling for The Big Short."

Then again, if Dow 19,999.63 can"t do it, we wonder if Dow 20,000.01 will be the long-awaited catalyst that finally unleashes the final euphoric spasm into US stocks.

TrimTabs Issues Warning After A Record $98 Billion Flood Equity ETF Since The Election

Having recently (before the election) found that stock buybacks have tumbled to the lowest level in 5 years, coupled with the lowest amount of insider buying since 2011, this morning TrimTabs Investment Research reported what regular readers already know, namely that U.S. equity exchange-traded funds received a record $97.6 billion from Tuesday, November 8 through Thursday, December 15, promptly TrimTabs to ask if "investors are all-in on US stocks?"

“The stampede into U.S. equity ETFs since the election has been nothing short of breathtaking,” said David Santschi, chief executive officer at TrimTabs.  “The inflow since Election Day is equal to one and a half times the inflow of $61.5 billion in all of last year.  One has to wonder who’s left to buy.”

Well, there is also the BOJ, SNB, the GPIF and a variety of other official and unofficial institutions who can print money at will to adjust their cost basis...

In a research note, TrimTabs points out that the inflow into U.S. equity ETFs since Election Day is equal to 6.3% of these funds’ assets.  December’s inflow has already reached $43.4 billion, putting this month’s inflow on track to surpass the record monthly inflow of $50.7 billion set in November.

TrimTabs also noted that buying has been persistently heavy since the election.  U.S. equity ETFs have had outflows on only three trading days, and inflows swelled to $27.8 billion on the five days ended Thursday, December 15, the highest weekly inflow in four weeks.

This, however, is far from a bullish sign according to TrimTabs, which issued the following warning as a result of the "breathtaking" inflows: “ETF flows tend to be a good contrary indicator when they become extreme, so the buying frenzy doesn’t bode well for U.S. equities,” said Santschi.  “The market also could get a nasty jolt in January, when investors who’ve been postponing stock sales this year in anticipation of lower tax rates next year start to sell.”

Bullish or not, one thing is certain: active investors, who are one of the primary "sources of funds" as this massive capital reallication has taken place, would be happy with even a fraction of this number going to them; alas so far the 2 and 20 model continues to be broken, as increasingly more investors