In a sharp reversal from yesterday, U.S. equity markets rallied hard throughout the day, closing near session highs. News of real progress on a slimmed-down $748 billion stimulus package added some optimism, as did the FDA's endorsement of Moderna's mRNA COVID-19 vaccine. Enhanced lockdown measures throughout Europe and in some U.S. cities did little to dampen enthusiasm today.

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That enthusiasm has been the general theme of the past six weeks except for a few days of despair in the equity markets. Portfolio managers have been racing to play catch up since November after sitting out most of the recovery rally. Their cash positions are the lowest they've been since May and their optimism is at a multi-year high. Some consider that to be a warning sign. 

Market technicians see it the other way. The number of NYSE and Nasdaq stocks making new highs compared to new lows hasn't been this high since 2017, and 2017 was a great year for stock investors. Higher highs are not a sign of a downtrend. But in 2020, downtrends have come with little warning, so anything can happen. Still, optimism is sky-high, and that's a tough trend to fight.

NYSE & NASDAQ: number of issues making new highs and new lows
Chart courtesy Willie Delwiche.

Did Fund Managers Over Do It?

Mutual fund managers have been putting cash to work in the last two months like it's their job. It actually is their job, but they were overly cautious during the first six months of the rally and now they are playing catch up. 

According to Bank of America's Fund Manager Survey (FMS), cash levels among fund managers in their survey plunged by 40% as portfolio managers chased tech and then value and emerging markets.  

As a result, these fund managers are underweight cash for the first time since mid-May. At 4%, which is where their cash levels stand on average, BofA says it has triggered a "sell" signal — or yet another contrarian indicator that shows that fund managers are too bullish. 70% of those surveyed say we are in the early phase of a global economic recovery, and like you, they expect higher returns in 2021. 

December FMS cash levels fell to 4%
Chart courtesy BofA.

Money Keeps Pouring out of Mutual Funds

That performance chasing I described above is being compounded by the fact that assets keep flying out of mutual funds and into cheaper, more flexible ETFs. This has been a trend that is a decade in the making, but 2020 accelerated it for a number of reasons:

  • A flood of new retail investors and traders who prefer the affordability, dynamism, and customization that ETFs provide.
  • A flood of new ETFs hitting the market like ARKK and JETS, which have taken advantage of the dislocation of markets and companies due to the pandemic.
  • The move to zero-commission trading in the past two years that allows retail and institutional investors to jump in and out of ETFs at will without the fees.
  • Mutual funds are not well suited for hyper-active markets — and we've had a few of those in 2020.

While mutual funds are still sitting on an $11 trillion mountain of assets, it is being eroded away every day.

cumulative flows
Chart courtesy Bianco Research/Investment Company Institute.

Stocks Making All-Time Highs

There were 167 stocks listed across all U.S. exchanges (excluding penny stocks) that registered all-time-highs today. It's been happening all year, and the mix of stocks topping new records is always interesting. 

Today's selection is an assortment of stay-at-home wonders, useful stocks, and emblems of the K-shaped recovery

  • MercadoLibre (MELI): The Latin American e-commerce giant has been crushing it all year and has hit many record highs as it positioned itself perfectly for the pandemic and lockdowns throughout South America.
  • Etsy (ETSY): Regular readers know that ETSY is the best performing stock since President Trump took office in 2017. The arts and crafts e-commerce and marketplace hub found its stride in 2020 and has tacked on a 320% return in the past year.
  • WD-40 Company (WDFC): Everyone has a can or two of this in the house, and in 2020, we may have more than one. This stock has been making record high after record high, and it's done so without squeaking.
  • Ferrari NV(RACE): K-shaped recovery, anyone? Ferrari has no electric vehicle plans until 2025 and its CEO just left unexpectedly. You'd think it would be in pit row right about now, but there have been a lot of Bitcoin and IPO millionaires this year looking for new toys.
stock prices