The market insanity is likely to continue this week as traders deal with uncertainty around inflation, but there is reason to believe we could see a bullish pivot by Wednesday. To understand why you need to know about the largest traders in the market and what they are doing.

About half the trading every day in the market is done by the managers behind exchange-traded funds (ETFs). These are like the mutual funds people hold in their 401(k) or IRA accounts.

Every time demand for an ETF's shares outstrips the supply of those shares, the ETF managers will make new shares ("creation") and buy the underlying stocks that they need to back those shares.

Conversely, if investors are dumping ETF shares, the fund will absorb them ("redemption") to keep the shares even with the price of the underlying assets that the fund owns.

It hasn't always been like this; just a few years ago, the proportion of daily trading done by ETFs was in the single percentages. The change comes with some important risks, but it can also provide some insights we wouldn't have otherwise.

After last week's extraordinary whipsaw, we need all the information and insights we can get.

A Changing Mindset

The market spiked 3% last Wednesday, only to be followed by a -3.5% decline on Thursday. On Friday, for the fifth week in a row, the market closed down. Although it hasn't dropped as far, this is the longest losing streak since the COVID-19 crisis in 2020.

Despite the decline, the ETF data is telling us something very interesting. Investors are dumping safe-haven ETFs and funds that hold bonds that protect against inflation. The top funds being purchased (created) are junk bond funds, S&P 500 stock funds, and mortgage-backed securities funds – all of these are very high risk.

What all that means is that, despite high volatility, buyers were more interested in risky assets than safer stocks and bonds.

As you know, we are among the analysts who still see this as a buying opportunity rather than a signal to get out of the market, and the ETF data says that the crowd with our point of view is growing.

What's Coming Up and What to Do

The catalyst for the big bullish spike last week was that the Fed softened their stance about short-term rate hikes. Yes, rates are going to still go up, but the Fed has convinced investors that they won't rise as quickly as feared.

If the outlook for rate hikes has shifted in a more moderate direction, then this week could unleash the dip-buyers in a big way.

On Wednesday, the Bureau of Labor Statistics (BLS) will release the Consumer Price Index (CPI). Those numbers have been astronomical lately, and the smart money is betting that this month's report will be a lot lower.

In fact, professional economists are expecting CPI to drop from more than 15% (inflation annualized) to 2%. It won't stay that low, but a drop like that should reset investor sentiment in a much more bullish direction. The next day, on Thursday, another inflation measure from manufacturers will come out, but the CPI will likely overshadow it.

When we sent our update last week, we recommended taking advantage of the lows by jumping into quality consumer defensive stocks like $Constellation Brands(STZ.US)$ and $Target(TGT.US)$. Those stocks jumped by 3.5% and 4.9% respectively on Wednesday, May 4. Yes, they gave up their gains when the whole market dropped on Thursday, but we see this as evidence that investors are ready to buy in a big way.

The Bottom Line

Stocks went for a wild ride last week that extended the market's losing streak by a small percentage. Counterintuitively, the biggest money flows shifted direction towards risky assets.

Combined with an expected temporary drop in the inflation rate this coming Wednesday, we think the market is in a once-in-a-decade position for dip-buyers to profit.