Dumb money indicators

on Tuesday, 26 November 2013. Posted in , ,
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21-stock-market-warning-signs-giving-global-investors-cold-sweatsExperts and average investors look at market rallies very differently.  Experts are always wondering when it will end, whilst weekend experts are telling their friends “look how much I made in stocks!  You should get in too!  It’s so easy!”.  It is a market truism that equity funds and ETFs see the most money flow in from average investors just before the market starts falling.

If you are thinking the market top might be soon, some new evidence today to support your case.  This year has seen the biggest inflow of money into equity funds since the end of the bull run in 2000.  And if you know your bull runs, 2000 was a real doozy with a market wide price-earnings ratio for the Nasdaq reaching 102 (that’s not a misprint).  A ratio of 10-20 is a much more normal number and 30 is considered extremely high.

As one commentator in the article pointed out…

 “The timing of retail investors tends to be terrible,” said Jonathan Pond, an independent financial adviser in Newton, Massachusetts, who oversees $200    million. The deposits may be a contrarian indicator of a market near a top, he said.

That’s not to say a run to bonds is a good idea.  If the taper talk turns out to be true, and sooner or later it will, then bonds will do very poorly over the next 2-4 years.  Interest rates have to normalize at some point, (i.e. go up) and with that, bond prices must go down.  It could be an ugly rush for the exits too since every large pension fund and professional hedge fund manager knows this too, so the allocation to equities may be less about hope and more about a perceived lack of options.  Not the greatest endorsement for a continued bull run.

This is all true of the American market, but sometimes analysts state-side forget there is a big wide world out there.  The US is no doubt very important, but it isn’t the only market.  The US market has had a great run but other areas look better relative value these days.

 

 

 

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