Passive Investing Wave

The money is going into passive investments.  The index-based ETFs.  It only took 7 years of underperformance by active managers for people to finally dump their mediocre fund managers for something that at least keeps up with the averages.  It doesn't signal a top for the market, or a bottom for active managers.  But it does signal that we are getting late into the run higher for the equities.  Over the long run, passive funds will always outperform active funds.  The transaction costs by themselves make it nearly impossible for active funds as a whole to beat passive funds.  But most investors are illogical, how else can you explain so much money being invested in hedge funds, which are basically wealth accumulation vehicles for the hedge fund manager.

The popularity of these ETFs make it much easier to sell, and the selling power is much more focused.  We could see another day like August 24, 2015, when the bids just disappeared, some ETFs didn't even open, and you went locked limit down in the S&P futures.  The derisking is going to be violent, because instead of having to do the cumbersome fund selling, you can just go online and push sell to get rid of your ETFs.  The panic will be tremendous when we finally do top out and correct.  The flash crash and August 24, 2015 are symptoms of quicker trigger fingers when the crap hits the fan.  With so much overvaluation, there is very little value support below.  You will not attract many fundamental buyers unless you get closer to 1800 on the S&P.  

Some may think it is looking way ahead talking about flash crashes and lock limit down S&P futures, but it is something that is very much possible in the second half of the year.  The markets have gotten so overvalued that you are setting up one of these quick wipeout scenarios.  And much of that will be led by panicking investors dumping their ETFs.  

We closed at another all time high yesterday.  The spring is getting coiled and potential energy for a new bear market is building.  Give it time.  Watch the VIX, and when you start seeing it rise along with the market, then you know the end is near.