Last Updated: 30 January 2023
As JK Galbraith famously said, there are two types of forecasters, those who don’t know and those who don’t know they don’t know.
Yet some people have to pretend that they can predict which way the markets are going, and do it for a living. I must admit that I surveyed the figures that Dave Nadig quotes in his latest blog (taken from the year-end NSX report on US ETF fund flows) with a sense of pity for those tasked with investing professionally. Is the admittedly well-paid job of being a fund manager really worth all those sleepless nights? Who would take on the job of dealing with such a schizophrenic beast as the stock market?
First, as Dave points out, US equity ETFs saw a slight net cash outflow during 2009. But, within the US ETF equity sector, there were US$8 billion of outflows from long funds, US$7 billion of outflows from long leveraged ETFs, but US$2.5 billion of inflows to short ETFs and US$11.5 billion of inflows to leveraged short funds!
And this during a year when the indices staged one of the most spectacular rallies ever seen, with the S&P 500 up 67% from its March lows! I wonder what the average investor buying leveraged short ETFs in 2009 was left with at the end of the year.
To give one example, here’s the price performance (adjusted for a reverse split in July) of the Direxion Daily Financial Bear 3* ETF, which took in US$3.3 billion of last year’s inflows to the leveraged inverse sector.
From US$ 357 on 31 December the fund rose to a close of US$1041 on 6 March, before subsiding all the way to US$19.43 at the year end. That’s a 95% decline for 2009, and a 98% drop from peak to trough. I know many commentators argue that these funds are for day traders only, but US$3.3 billion of net inflows for the year still say that quite a few people forgot to sell at the end of the afternoon…
Then, according to Dave’s blog, the SPDR S&P 500 ETF, the largest exchange-traded fund in the world, which had seen US$31 billion of outflows in the first eleven months of the year, suddenly saw a huge reversal in cash flows in December, with nearly US$12 billion of net purchases.
In other words, investors had been concentrating on short equity exposure all year, only to capitulate at the end of 2009 and go long.
Wouldn’t it be the nastiest possible outcome for the average investor if the equity markets were now to turn tail and head south again?
There certainly appear a number of warning signs. Sentiment indicators in the equity markets are flashing alarm signals according to Mark Hulbert’s latest commentary, and the VIX measure of option implied volatility is trading at its lowest level since the summer of 2008.
But here I am straying into Galbraith’s second category again. New year’s resolution, try and stay in the first…