Thursday, April 30, 2015

Tracking The Money Flows

We ended Tuesday's post with a look at the dollar's April weakness and posed the thought that this might spur money to flow back into Large Cap multinationals.  And after surveying the most recent data, it appears this is indeed happening.

On a year to date basis, investors have sold out of U.S. Large Cap stocks en masse.  As of yesterday, more than $40 billion had left the asset class since December 31st (most of that coming out of the SPY ETF).  This made a fair amount of sense as Small and Mid Cap stocks had reasserted themselves in the year's first 3 and a half months and handily outperformed Large Caps.  Part of this should be attributed to mean reversion as Large Caps crushed Mid and Small last year but we see the dollar's moves as the major contributor.

However, over the last week we've seen these sentiments unwind a bit and money flows favoring Large Caps.  According to Convergex, Large Caps have brought in nearly $2 billion while Small Cap funds have lost more than $400 million.  It certainly appears that the dollar's recent decline has prompted investors to reallocate back into the Large Caps as they happen to generate a large chunk of their revenues from international markets.

Mid and Small Caps are still outperforming the S&P 500 on a year to date basis but the senior index definitely gained some relative strength in the 2nd half of the month.  We'll continue to use the dollar's moves as one of our primary inputs when looking for strength by market cap.  Case in point, the dollar has fallen further today and while most markets are down, Small Caps are really feeling it with the IWM down nearly 2%.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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