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Retail investors exit US stock funds

U.S. stock markets may be continuing their slog higher, hitting fresh record highs this week, but retail investors have decided to lighten their load with equity funds seeing the first outflows since the start of 2014, according to new data.

U.S.-based stock mutual funds - which exclude exchange-traded funds - saw net outflows of $1.7 billion in the week ending July 2, according to research tracker Lipper on Thursday. It marked the first time outflows were seen for 27 weeks, said the company.

These stock mutual funds are traditionally purchased by retail investors, whereas ETFs - which track a benchmark index - are believed to be more frequently used by institutional investors, according to Thomson Reuters, the parent company behind Lipper. Stock exchange-traded funds saw net inflows of $4.8 billion last week.

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Whilst this might ring alarm bells for some, with hefty valuations leading many to question the recent bull market in equities, Brenda Kelly, chief market strategist at brokerage IG, believes that the outflows are understandable with the second-quarter earnings season just around the corner.

"In light of the poor GDP (gross domestic product) number in the first-quarter stateside, investors will likely want to know whether or not companies have experienced a rebound in activity in (the second quarter)," she told CNBC via email.

"Revenues have for the most part exceeded expectations over the past four quarters so there's a good chance some are awaiting confirmation that this can happen again."

Michael Hewson, the chief market analyst at CMC Markets agrees, adding that it would make sense to do a little bit of portfolio readjustment before the beginning of the second half of the trading year.

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Jay Brousseau | The Images Bank | Getty Images

"Given recent gains the potential for disappointment with respect to the forthcoming earnings next week remains a distinct possibility," he told CNBC via email.

The Dow Industrials and S&P both remain in uncharted terrain and both reached record highs on Tuesday. The former broke the psychological barrier of 17,000 points for the first time on Thursday. This uptick in equities began around six years ago after the financial crash of 2008 and buying reached another level at the beginning of 2013 with stocks seeing stellar gains as the U.S. Federal Reserve continued its easy monetary policy.

Browsing the Lipper data, Gemma Godfrey, the head of investment strategy at Brooks Macdonald told CNBC that this move out of stocks by retail investors can be seen as a sign of caution. Instead of equity funds they have favored cash and ETFs which are both more liquid so investors can exit more quickly, she said.

"Profit-taking at the end of the quarter to lock-in gains is not the complete picture," she said. "Swings in markets remain muted and the limited move that took the Dow to an all-time high yesterday shows a lack of participation and conviction."

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Some analysts have warned of a pullback in markets they believe have become overheated and the Nasdaq has seen recent dips for momentum stocks, with high-flying technology and biotech shares bearing the brunt of the selling.

But stocks could continue to tick even higher, according to Kelly, who cites data from this week's AAII Investor Sentiment Survey. The report measures the percentage of U.S. individual investors who are bullish, bearish, and neutral on the stock market for the next six months. The results saw a 1.3 percent increase in bullishness for these retail investors from the previous week..

"There is certainly room for additional gains in upside should this trend continue. One could expect to see the retail sector make a return to equity markets," she said.

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