Lipper Inc. reported recently that U.S. stock mutual funds experienced the highest two-week inflow of new money since April, 2000. Meanwhile, the Investment Company Institute showed deposits into mutual funds last week were the highest since early 2007. April 2000 was near the peak of the 1982 to 2000 bull market, and 2007 was the peak of the market prior to the Great Recession. It would appear that mutual fund investors are, yet again, piling into these products at high market levels.
The American Association of Individual Investors poll also showed sentiment jumped to 52.3% bullish, and bearishness dropped to only 24.3% last week. If you follow contrarian sentiment statistics, all of this information will have you squirming in your chair right now – too many bulls can be a sign of “irrational exuberance”, as former Federal Reserve Chairman Alan Greenspan once put it. This excess optimism by retail investors often coincides with market tops. Excess pessimism, conversely, can signal a market bottom. Contrarian indicators are not precise buy/sell signals, but I have found that they invariably prove correct – given a bit of time. The recent bullishness by “dumb money” (retail investors and mutual fund buyers) suggests my technical thesis for a market top coming may be correct.
Meanwhile, RSI, stochastics and other momentum studies are looking overbought, as shown on this weeks chart. I’ve raised a bit of cash for a likely near termed pullback. I sold the last of my Canadian bank positions late last week. I will redeploy that cash upon a reasonable pullback. Seasonal trends can be a bit soft in February, so the coming weeks may provide an opportunity to buy back into some favoured stocks and ETF’s. I’m looking for one last rally into March to my long-stated target of 1550-ish on the S&P 500 before I get out of the market aggressively. I’ll provide some of my favourite ideas to trade theses trends over the coming weeks on this blog.
Later this week
I hope to post an interesting study on a trading system that offers a new twist on seasonal investing later this week. It asks the question – is there a way to profit by combining seasonal rotation between high and low beta ETFs? Look for it on Wednesday or Thursday.