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Doomed Stock Rally Burns Fewer Bulls After $10 Billion ETF Exit

by Gilbert R. Brooks

(Bloomberg) — Stock buyers across the ETF world have disappeared after seeing their account balances destroyed too often during the 2022 collapse.

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Three times, to be exact. That’s the 5% bounce rate that hasn’t held up in the S&P 500 this year — luring billions of dollars into exchange-traded funds with each uptick. Not this time.

Doomed Stock Rally Burns Fewer Bulls After $10 Billion ETF Exit

As the S&P 500 rose more than 6% from its 2022 trough through Friday, data collected by Bloomberg show that about $10 billion was taken out of equity funds.

The bearishness has proved prescient this week as the sell-off resumed in earnest, with the S&P 500 falling 2% on Tuesday.

The outflow shows investor sentiment is souring after the once-successful strategy of buying the dip.

At some point in the past two weeks, hedge funds tracked by Morgan Stanley cut their equity exposure to its lowest level since 2009. Meanwhile, retail investors abandoned their longstanding bullish position and sold stocks at the fastest pace in nearly two years.

All the bearishness could eventually set the stage for what opponents see as a sustainable recovery. But for now, it reflects growing fears that any uptick is nothing but a bear market rally, with the Federal Reserve committing itself to its most aggressive tightening cycle in decades to fight red-hot inflation.

“Buy-the-dips is a good strategy when the Fed is easing markets and injecting liquidity,” David Donabedian, a chief investment officer of CIBC Private Wealth Management, said in an interview. “Sell-the-rallies is a better trading strategy in a Fed tightening mode. I don’t think we’ve seen the lows of this bear market yet.”

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Technology mega-caps bore the brunt of the sale on Tuesday as the Nasdaq 100 fell more than 3%, extending its loss to 29% in 2022. The S&P 500 is down more than 20% since its January peak and is stuck in its second bear market since 2020.

Futures on the S&P 500 had changed little by 7:15 p.m. in New York.

The lack of inflows into equity ETFs of late was a wastable departure from May when traders poured $30 billion into the funds during a 7% market rally. A similar recovery in March drove inflows of $42 billion, while another was cushioned in January with an addition of more than $5 billion.

These bottom-fishing efforts proved futile as the S&P 500 reversed its course and hit new lows one after the other. The stock market’s bottom feeders have dodged this latest slump by selling the recent rip.

“Investors are increasingly concerned about a recession and vacuuming their bear-case scenarios,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors. “There has also been a reassessment of the Fed – right or wrong,” he said, referring to the risk that the central bank will fight inflation at any cost, even if it comes at the expense of growth.

(Updates with futures trading in the 10th paragraph)

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