Does this make you nervous or confident?
Individual investors have finally decided to stop withdrawing money from equity mutual funds in order to buy bond mutual funds. Since the start of September $13.3 billion has flowed into U.S stock funds and $1.2 billion back into European stock funds, according to EPFR. According to the Investment Company Institute, which tracks flows in a different manner, net cash flows turned positive for U.S. equity mutual funds in the last two weeks for the first time in six months.
This still leaves the flows for the year very heavily into bond funds and out of stock funds. For the year, according to EPFR, about $50 billion has left U.S. equity funds and $20 billion has flowed out of European equity funds.
I guess individual investors are finally convinced that stocks are a better bet than bonds. All it’s taken is for the Federal Reserve to drive interest rates down to 0.11% on the 3-month Treasury bill and to 2.62% on the 10-year Treasury bond, and for the Standard & Poor’s stock index to rally by 14% from August 26 to 10:30 ET on November 1.
If you know the reputation of individual investors as a group that buys into a trend near its top, this move towards stock mutual funds quite possibly make you nervous. Isn’t this a sign that this rally is about to fold like a venetian blind?
I’d say certainly not yet for two reasons.
First, the trend out of stock funds and into bond funds has a way to go before we reach break even on the year. Sure, investors put $13.3 billion into U.S. stock funds in September, but considering the $50 billion that has left these funds in 2010, cash flows need to continue for a while before equity funds hit break even—let alone show a cash flow bubble for the year.
Second, the Federal Reserve has just promised to keep trying to drive bond rates lower for the rest of 2010 and into 2011. That’s the goal of the Fed’ $600 billion program of Treasury buying announced on November 3. That would keep alive one factor that has pushed money out of bonds and into stocks in recent weeks.
In other words, I don’t think that the stock market is about to reverse on a dime just because mutual fund investors have rediscovered stocks.
The key to the market remains the Federal Reserve. You can say that mutual fund investors have now latched onto that fact.
Mr Vann. Thank you.
I wonder the masses always come in when the party is peaking and just in time to take over the professionals’ chips.
I have been cashing out and selling losers in the last few weeks. I maybe wrong, but the market’s non-stop assent since Aug. is little scary. I decided it’s better to have a smaller profit than a loss.
There is a someone by the name of Paul McWilliams who for a hefty monthly fee, does pretty well in covering most semiconductor stocks. Not sure if that’s where you invest mostly, but…he is most def worth reading
jandav, I don’t know if you also read Ed McGonigal’s blog (http://edstalkingstock.wordpress.com). Ed posted many times to Jim’s blog, and I always have enjoyed and respected his thoughts). I posed the question to him. He rightly pointed out that ARMH is still very pricey and may be headed further down. He suggested MIPS would be the better pick since it is a bit less pricey and in his words has more room to grow. Sounds sensible and he is not the only one talking about MIPS.
Ha ha, I’ve just started to liquidate from an all in position, though I’m not calling a top – I just need to advance my cash position for next year’s expenses (investment is my only income).
Re Armh and Mips, I’ve been holding both, too. And I’d appreciate any input. Are they going lower, or is a bounce pending?
Don’t you think that a lot of this money flowing out of stock funds is a result of unemployment and people pulling money out to live on?
Hi Jim,
What are your thoughts on Canada blocking the POT sale. Also what did you think of AGU earnings report? Do you think the fertilizer stocks might be do for a pullback?
Again, off topic: Has anyone been keeping an eye on ARMH and MIPS? I have been a big believer in ARMH. With it’s recent drop, I am trying to decide whether to add to my position. Just wondering if anyone else that might be following this has any thoughts on the subject?
Every chart indicator I have tells me that this market is overbought, and ready for a fall.
Butt.. It is not technicals anymore, and it is not fundementals, it is the Fed, and the dollar.
Fed prints, dollard down, market screams up.
Time to buy before it goes any higher.
Off topic: BAC Edges Towards Tipping Point: http://www.bloomberg.com/news/2010-11-04/bank-of-america-edges-closer-to-tipping-point-commentary-by-jonathan-weil.html
If something does happen with BAC or any other TBTF, will be interesting how the new Congress reacts.