Growing imbalances in the US stock market - May 10, 2015

Growing imbalances in the US stock market

Despite the US stock markets continue to break record highs, we see big imbalances in the background. Bank of America Merrill Lynch published a new survey that shows US investors have pulled 99 billion USD out of the equities year-to-date including net outflows in 11 of the past 12 weeks. What’s more, we saw the biggest outflows from equity in amount of 17,2 billion USD this year.

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Generally we could see that S&P500 index has more than tripled from its March 2009 low but this rally has happened with very light volume, namely only one third or half of the usual volume of a normal bull market. There could be a lot of facts behind the scenes but one thing is sure, namely there is an invisible hand that is driving the markets.

Janet Yellen, Head of the Federal Reserve warned of the risks from quite high stock prices on 6 May. She also said that stocks are not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there.

As the chart shows above, disconnect is getting bigger in the US stock market and the cumulative US equity flow. As the gap and the imbalance grow, it is quite possible we are facing a bigger correction we haven't seen in the market in years. So it is advisable to get those helmets on and reduce some risk and raise the cash level in investment portfolios.

By Innovative Securities

(Image source: Wikimedia)