If yesterday’s exuberant spike in stocks (surging Dow above 21,000), on a day when economic growth expectations were crushed, was not enough to scare you about the ebulient animal spirits in the markets, then perhaps this will. The largest S&P 500 ETF (SPY) was inflows of $8.2bn – the biggest daily inflow since Dec 2014 (and second largest in 6 years).

In the past, these massive floods of retail panic-buying flows have stalled the rallies (and not ended well).

This massive inflow appears to confirm what JPMorgan has been seeing, that the latest “Great Rotation” is one not from bonds into stocks, but from “smart money” to retail investors who have finally joined in the market euphoria, traditionally seen as a topping sign for rallies.

Confirming what BofA observed last week, JPM writes that in contrast to retail investors, institutional investors appear to have overall reduced rather than increased their equity exposure YTD.

JPM’s punchline:  

“This apparent unwillingness by institutional investors to raise their equity exposures YTD reinforces the argument that it is retail rather than institutional investors that most likely drove this year’s strong inflows into equity ETFs and as a result this year’s equity rally.”

There are several implications from these findings.

The first is that with ETFs the dominant vehicle of expressing market sentiment at this moment – almost exclusively by retail investors – it means that certain distinct market “aberrations” have become an odd fixture of the market, such as the now daily market ramp in the last 30 minutes of trading, which was on display most recently on Friday when as we discussed, a last minute burst of buying pushed the S&P not only to the green, but sent the Dow Jones to a new all time high just 7 seconds before the close of trading.

The other obvious finding is that the vast majority of professional, active investors and asset managers are taking advantage of the current market rally to sell risk and offload exposure to retail investors, who remain in the driver seat and provide ever higher prices against which to sell.