Santa Claus rally expected, but will it come?

Exchange traded fund (ETF) traders have been positioning “aggressively” for a Santa Claus rally, but contrarian investors would say this is a negative thing for the short-term market outlook, according to analysts at TrimTabs Investment Research.

The trailing one-month inflows of $17.5 billion into US equity ETFs are more than double the one-year average of $7 billion, and “most major sentiment surveys indicate that bullishness is still very high, even though the overall US stock market declined in the past month,” TrimTabs analysts said in their weekly liquidity report.

Another headwind for US equities over the short term is the fact that new offerings are “exploding,” they said. The past week was the fifth-highest in terms of volume of new shares, at $13.5 billion. This was the second-highest volume in the first week after Thanksgiving in the past decade. Volume post Thanksgiving was higher only in 2009, when banks were selling shares to raise capital in the aftermath of the financial crisis.

The analysts at TrimTabs reminded investors that the US stock market “tends to struggle” when new offerings exceed $10 billion weekly. This week, equity issuance could be heavy again, as underwriters race to get deals done before Christmas.

Looking at capital flows data from Bank of America Merrill Lynch for the week that ended on December 2, European equities, which saw inflows in 27 of the past 29 weeks, saw another $2.3 billion pouring in.

This was before the news conference where European Central Bank President Mario Draghi stopped short of promising an increase in the size of asset purchases by the central bank, although he did announce the diversification of the types of securities that the ECB will buy and the extension of the programme to March 2017.

Draghi also suggested that the ECB would tolerate inflation above its official 2% target for a while to ensure that growth is back on track, a departure from the central bank’s mandate that could be a sell signal for the euro.

US equities saw $1.6 billion going in last week, all via ETFs, while Japanese equities ended their three weeks of outflows, posting inflows worth $200 million.

Emerging market equities saw modest outflows again, worth $400 million. It was the fifth straight week of outflows from the asset class.

In fixed income, investment grade bond funds saw their largest inflows in 26 weeks, worth $3.1 billion, while junk bonds saw their first inflows in four weeks, worth $1.2 billion.

Emerging market debt funds, which saw outflows in 18 of the past 19 weeks, saw $1.6 billion more in outflows in the week that ended on December 2.