Stock Market: Smart Money’s Quiet Massive Exodus

Stock Market Smart MoneyTwo weeks ago, I wrote about how investors are exiting the stock market. That situation has now gotten worse. Investors, especially what is referred to as the “smart money,” are making a beeline for the stock market exit door.

From the chart below of the National Association of Active Investment Managers Exposure Index, you can see the percentage of U.S. stocks that active money managers hold in their portfolios.

NAAIM Exposure Index Chart

Chart courtesy of

In February, the active managers held almost 100% of their portfolios in stocks. The last time I reported on this (just two weeks ago), it was 60%. Now they hold less than 50% in stocks.

Dear reader; don’t take this lightly. In just a few months, money managers have reduced their exposure to stocks by 50%. Active money managers really don’t like stocks right now.

And “retail investors” are ditching stocks, too.

According to the Investment Company Institute (ICI), in the first six months of 2015, investors pulled a staggering $53.53 billion out of long-term U.S. stock mutual funds. Looking at the weekly data from July 1 until August 5, another $35.1 billion worth of long-term U.S. stock mutual funds were sold. (Source: Investment Company Institute, August 12, 2015.) This brings the year-to-date total to over $88.6 billion already.

This is where it gets interesting (or should I say sad?).

In June of this year, margin debt on the New York Stock Exchange (NYSE) stood at $504.9 billion—a record high. This is the amount of money investors have borrowed to buy stocks. (Source: New York Stock Exchange, last accessed August 17, 2015.). If investors are taking so much money out of the stock market, and the stock market is declining, with so much money borrowed to buy stocks, we have the perfect recipe for a catastrophe. As stock prices continue to fall and margin calls are made, the decline in the price of stocks could speed up.

How the Stock Market Will Look by the End of 2015

If you are a long-time reader of Profit Confidential, you know I’m very negative on stocks. My belief: We’ve had a great-big dead cat bounce from the stock market lows of 2009. That rebound in stock prices was extended courtesy of the unprecedented easy money policies of the Federal Reserve. In fact, 2015 will be the first year since 2009 that stocks are down for the year. A huge market top has been put in.

There are so many factors working against the stock market: world economic growth is getting weaker, currency wars are pushing the prices of goods down (deflation), U.S. companies are reporting a contraction in both profits and revenues, and the Fed is talking about raising interest rates as opposed to starting QE4. The Fed’s position on the latter will likely change at the first sign of any bubble bursting in the economy. The outlook for stocks remains negative.