Signs of a Stock Market Top? Have Bonds Reversed?

In my Bond Bubble Special Report late last year, I documented how statistical data from the Investment Company Institute (ICI) showed that retail investors were taking money out of equity mutual funds and stashing it in taxable bond funds. Unfortunately, they were jumping out of the frying pan into the fire, since bond risks were/are as high as I have ever seen them, with interest rates near historical lows.

More recent ICI data, however, show that retail investors are now moving back into equity mutual funds at a gradual pace. It’s certainly not yet a flood of money, but the trend has definitely changed. That is concerning to some market analysts because of the old “smart money” advice that you should see how the general public is investing and then do just the opposite.

The thought process behind this advice is that retail investors are usually late to the party, so if they are investing in a certain asset class, there may be a good chance that the market is topping out and it’s time to get out.

Is this what the ICI data are showing us? Are we at a market top? I don’t think so, and here’s why – elsewhere in the ICI data we see that inflows into taxable bond funds are still at very high levels. Not only are retail investors not taking money out of bond funds, but they’re continuing to add money to them. The following table courtesy of ICI tells the story on long-term retail mutual fund flows:

As you can see in the second line – “Domestic” – equity fund outflows reversed at the end of last year and turned significantly positive in the week ended January 9. In the bond numbers, notice that flows into “Taxable” bond funds have also increased significantly since the end of last year, even though Treasury yields have jumped more than a little in recent months.

So where is the new investment coming from? Other data from ICI reveal that at least some of this flow into equity mutual funds is coming from retail money market funds, which decreased 8.3% over the past weekly reporting period. In other words, some retail investor money is finally moving off of the sidelines and going into stocks after witnessing four straight years of gains in the major stock indexes.

There’s an old adage in the investment business saying “don’t fight the tape.” It means that sometimes the markets go up without good economic or technical justification, so you should grab a ride while you can. The problem is that many investors who follow this advice get into the market just in time to get creamed. There’s got to be a better way.

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Getting back to our subject at hand, I don’t think we’re seeing a major migration of retail investors into equities. Instead, I think it’s just that some retail investors are taking some of the cash they have on the sidelines and testing the equity waters. Never mind that the major US stock indexes are at or near their all-time highs, meaning the risk is very high.

Let me know what you think of my new 7 Secrets Special Report. I always love getting feedback from my subscribers.

Finally, have you been watching bonds lately? The yield on the 30-year Treasury bond has risen from the low of 2.4% in July to 3.2% this week. That’s a jump of 32%! That’s BAD news for Treasury bond holders. And it may be far from over. I strongly suggest that you re-read my Bond Bubble Special Report and call us to see how you can take advantage of rising interest rates. Call 800-348-3601.

Have a great weekend everyone!