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Pam and Russ Martens: How is stock market rising as investors stampede out?

Section: Daily Dispatches

By Pam and Russ Martens
Wall Street on Parade
Monday, August 31, 2020

The S&P 500 stock index set a new record high on Friday, closing at 3508.01 – the first time it has ever closed above 3500. In fact, the S&P 500 set a record high close every single day last week. ...

Refinitiv Lipper has been reporting fund flows into and out of the stock market for the past 18 years. According to Refinitiv Lipper, for the week ending Wednesday, August 26, stock (aka equity) mutual funds and stock ETFs had a combined negative outflow of -$7.8 billion. For the week ending Wednesday, August 19, stock mutual funds and stock ETFs had a negative outflow of -$6.6 billion.

... Dispatch continues below ...


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Put the two weeks together and you have investors yanking a net $14.4 billion out of stock funds. Where was the money going? For the most part, it was going into taxable bond funds.

So exactly how can a stock market index be setting new record highs when investors are cashing out and the majority of the stock components in the S&P 500 are far from their record highs?

The S&P 500 is made up of approximately 500 companies at any one time. The index is market-capitalization weighted, a system that divides the market cap of a company by the index's total market capitalization to determine its influence in the index.

When you have six companies that have been dramatically outperforming other stocks this year, and just five of them -- Alphabet (parent of Google), Amazon, Apple, Facebook, and Microsoft -- make up more than 20 percent of the S&P 500's total market capitalization, you can get an aberration in the pricing of the broader index.

To put it simply, were it not for these six stocks, the whole S&P 500 index would be negative for the year. DoubleLine's Jeffrey Gundlach, a veteran market watcher, calls this "classic bear-market-rally activity."

It is also known as "distribution" on Wall Street. That's when the little guy is seduced into the stock market on the illusion that it is rocketing to one all-time high after another. This gives the knowledgeable insiders who want out the necessary dumb money on which to dump their shares. ...

... For the remainder of the report:

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