There is one major problem when the entire market is a rigged casino (by both the Fed and HFTs), favoring degenerate gamblers over traditional investors: at the first whiff of trouble everyone bails. Or as BofA politely puts it, “Typically flows follow returns and this week was no exception.” In the past week, trouble whiffed, and the degenerate gamblers, loaded up to the gills with record margin debt hightailed it out of the casino, leading to the largest weekly equity fund outflow in over two years! Add some record leverage to the equity withdrawal, continued EM turbulence, ongoing Japanese deflation exports, oh and of course the ongoing Fed taper which has been solely responsible for all S&P gains since 666, and suddenly you have all the ingredients for a broad market crash.
More from BofA:
“… equity, high yield and EM bond funds all reported large outflows last week after the sharp selloff in risk assets driven by weakness in EM. At the same time munis – the asset class that benefits most from the rally in rates – had the first significant inflow (+$0.46bn) since May. The $12.02bn equity fund outflow was the largest weekly outflow in over two years. EM funds also saw a sizable $2.65bn outflow, driven by local currency funds – the largest since June. This outflow also reversed the slowdown in EM redemptions that we saw during the first three weeks of the year.”
And charting the YTD fund flows across all asset classes: