Money Managers Could Be Expecting a Stock Market Crash

The odds of a stock market crash continue to stack higher. Stock investors beware, because major losses could be ahead. Capital preservation could be very important in the next few months.

Investor sentiment is changing, and there's a lot of evidence of it. This is not only not good, but also foretells a stock market crash.

Consider the chart below as one example. It shows the National Association of Active Investment Managers' Exposure Index. At its core, this index shows what percentage of active managers' portfolios consists of stocks.

As it stands, just about half of their portfolios are stocks. Go back to end of 2017, this percentage was over 100%. That means investors were borrowing to buy stocks.

Chart Courtesy of StockCharts.com

For the major part of 2016 and 2017, their portfolios were almost entirely stocks.

Don't take this lightly. The chart above is suggesting money managers are turning sour on stocks, and they may not be too optimistic going forward. By looking at the pace of reduction in stock exposure, one could even say they are anticipating a stock market crash.

Mutual Funds and ETFs Witness Massive Outflows

But don't just look at the exposure index. Look at the u.s. stock mutual funds, and exchange-traded fund (ETF) inflows and outflows as well. They indicate that investors could be running for the exit.

According to the weekly data from Investment Company Institute (ICI), between early February and the third week of March, investors withdrew $52.0 billion from long-term U.S. stock mutual funds and ETFs. (Source: “ Long-Term Mutual Fund and Exchange-Traded Fund (ETF) Flows,” Investment Company Institute, last accessed April 2, 2018.)

We don't have the monthly data yet, but the weekly data shows that investors withdrew the greatest amount of money from U.S. long-term stock mutual funds and ETFs since at least January of 2016.