As The Herd Turns to Bonds, Bet on Stocks
Investors hate stocks.
Analysts do too.
Every month, the markets move higher and the herd grows even more restless than before. Investors impatiently wait for the next crisis… the next meltdown… the next ferocious blow that will finally lay equities to rest once and for all.
Yet as investors continue to focus their attention on the lackluster performance of equities over the past decade, signs are emerging that a massive tipping point in the markets isn’t far off.
If you’ve been paying attention, you know all about our discussions regarding “peak pessimism ” this year — and what it could mean for the beginnings of a new bull market.
The evidence is clear: Negative sentiment has risen to historic levels. Analysts continue to forecast lower earnings in reaction to every minor market correction. The financial news networks have become an echo chamber of fearful speculation (helping to drive their ratings to 7-year lows in the process). Bond king Bill Gross even jumped on the bandwagon, claiming recently that the “death of equities ” is here.
It’s a contrarian’s dream come true…
Here’s how I saw it shaping up just a couple of months ago:
“The bottom line is we’re seeing signs that the pessimism is reaching its outer limits. That’s a great contrarian indicator. Remember, true contrarianism doesn’t instruct us to mindlessly latch on to an opposite position. Instead, it tells us to look for these extremes. The crowd is usually wrong at turning points. And it’s possible that one of these important sentiment turning points isn’t too far off… ”
Now don’t get me wrong — this tipping point won’t occur with the flip of a switch. In fact, most people won’t recognize the turning of the tides until well after the fact. Yet the evidence continues to pile up. Despite the S&P’s bullish performance so far this year, no one wants to deal with stocks…
Here’s Reuters with more:
“During the first seven months of 2012, investors pulled $40.4 billion from U.S. stock funds while taxable bond funds attracted $144.2 billion in net new flows, according to the Investment Company Institute. ”
But that’s not all. So many investors are abandoning stock market funds that even the most storied money management firms in the country now find themselves catering to bond and money market investors.
According to Reuters, more than half of Fidelity Investment’s $1.6 trillion in managed assets are now invested in bond and money market funds. Keep in mind this is the same Fidelity that “built an empire in the 1980s and 1990s on stock funds and star stock pickers like Peter Lynch. ” And even though the firm’s all-star managers continue to make the case for equity investments, the public remains hungry for bonds and other “safer ” investment vehicles.
So why could all of this anti-stock sentiment actually be good for equities?
To answer this question, you have to think like an investor who hasn’t been able to squeeze a buck out of the stock market in more than 10 years. Think of everything that has happened since 2001, from the dot-com bust to war to the 2008 financial crisis. There’s simply no motivation for investors to jump into the stock market. If your neighbor isn’t making money, why should you even try?
So with peak pessimism in full bloom, we have a nation of terrified investors with a ton of money sitting on the sidelines. And with the stock market just a stone’s throw from its all-time highs, we could soon witness a massive shift in sentiment, thrusting a ton of new money into stocks.
Barring a worldwide economic disaster, this tipping point is coming. You might not see it tomorrow. You might not see it next month. But when the investing public takes notice of a strong stock market, its collective fear will begin to dissipate. When it does, investors will look at stocks in a way we haven’t seen since the last century.
Greg Guenthner, CMT
Questions or comments? Drop us a line at firstname.lastname@example.org.
Sign-up for the FREE Trend Playbook e-letter to get Trend Playbook sent directly to your inbox.
Start your free Tomorrow in Review email subscription...We Will Not Share Your Email Address
We Value Your Privacy