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David Santschi, CEO TrimTabs, reflects on how he sees January unfolding:

The soothing words central bankers offered in the past couple of months were obviously insufficient to calm financial markets, which may explain why Federal Reserve Chairman Jerome Powell dangled the Powell put in front of market participants on Friday.  If the major U.S. stock market averages drop below their December closing lows and the partial U.S. government shutdown lasts much longer, we expect Federal Reserve officials to signal that they are contemplating a slower pace of rate hikes or even paring the $50 billion per month they continue to drain from the financial system.

  • Although the S&P 500 is down 14% from its record high in September, overall short interest has barely budged, and day traders have been consistently paring their holdings of leveraged short ETFs.  From a contrarian perspective, we would like to see short interest start rising and leveraged short ETF flows turn positive.
  • The disparity between MF flows and ETF flows reached record levels last month.  We estimate that equity and bond MFs shed a record $152 billion, while equity and bond ETFs issued $50 billion.  We will be watching to see if ETF flows finally subside this month.
  • Retail investors abruptly lost their appetite for fixed income last quarter.  They pulled a record $119 billion out of bond MFs, and outflows swelled to a record $61 billion in December alone.  We will be watching to see if big outflows persist even though bonds dramatically outperformed stocks in the past month.

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