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Are Aggressive Passive Investors Driving This Parabolic Market?

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A monthly chart of the S&P500, showing the beginning of the 2008 crash

As the month draws to a close, it marks the tenth anniversary of the beginning of the 2008 stock market crash. In January of that year, the range of the monthly candle was the largest seen in years as volatility returned to the market with a vengeance. During the month, the S&P500 pierced it’s monthly -1ATR channel for the first time in five years before recovering, but the damage was already done.

The February, March, April and May candles managed to close above this ATR line, but the selloff continued in June – and the rest is history. Seemingly rock solid firms went bankrupt, banks were nationalized and several developed countries suffered the embarrassment of having to be bailed out by the IMF. But, that’s all ancient history to the next generation of traders who are currently entering the market.

People generally start to dabble in the markets in their mid to late twenties, which means today's new traders were about sixteen or seventeen when the last crash happened. Millennials are a much-maligned social group. Born after the 1980’s, they have been under the sociologist’s microscope ever since. Apparently, they are ‘socially connected’, but anxious and ‘want to make a difference’. They are also the first generation of traders and investors who are tuned into the concept of DIY passive investing via index tracking Exchange Traded Funds (ETF's). I suspect millennial traders and passive investors pouring into one particular ETF are contributing to the parabolic climb we are currently seeing in the market.
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A chart showing the net assets under management of the SPY ETF

In the past ten years, the explosion of online trading and ETF’s has totally transformed the market environment. For example, the SPDR® S&P500® ETF (SPY) is currently the largest traded instrument in the US market, but it was relatively unknown to retail investors back in 2008. As of last Friday, there was $306.47bn of net assets under management in the SPY, while on Jan 31st, 2008, it was just $84.8bn*

The black line on the chart above is the S&P500 index ($INX), the blue line is the total value of assets under management in the SPY ETF (in millions of dollars), and the red line is the difference between them.

We can clearly see the amount of assets under management is growing steadily, but I am particularly interested in the fact that during the past three months the flow of funds into SPY has shot up (pink arrow). The last time we saw this was in 2007 and 2014 (green arrows), in the run up to two corrections (red arrows). Are late-to-the-party SPY fans the new ‘dumb money’?

This is the first time I’ve pulled this data together in an attempt to gauge the aggression of passive investors and there is simply not enough data to draw a definitive conclusion, but I’ll be tracking this data closely going forward. I especially want to see how the black and red lines interact when this parabolic market eventually surrenders to gravity.
© Ian Murphy 2018
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