It is often stated that retail investors represent the “herd” mentality. That, like lemmings, they tend always to do the opposite of what they should by “buying high and selling low.”  For the most part, those statements are true and have been repeatedly shown in surveys and studies over time.
However, over the weekend as I was writing The X-Factor Weekly report, which discussed the new SEC ruling on money market mutual funds, Alan Greenspan’s ignorance and the “warning sign” from “junk bonds,” I stumbled across an interesting data point.
“Furthermore, as I have repeatedly stated over the last several weeks – bonds are not buying the current market rally. As shown in the chart below, despite the ongoing chorus of “sell all your bonds as rates are about to rise,â€Â money flows into bonds has been picking up steam.”
(The following chart is data sourced from ICI which shows the flow of funds by mutual fund investors into equity mutual funds versus bond mutual funds.)Â I have highlighted the point at which equity flows turn negative after being positive.Â
While not a “perfect” market timing indicator by any means, it is interesting is that despite claims of retail investors being “dumb money,” it appears that their actions may indeed actually lead the market. As noted, retail money flows into equity mutual funds have turned negative just prior to short and intermediate term market corrections.
Furthermore, even as the mainstream analysts continue the “stock market rally is here-to-stay” even it “rates rise” mantras, retail investors “ain’t buyin’ it” and are upping their holdings in bond funds. The chart below shows the disparity between interest rates and the S&P 500 index.
