Monday, August 23, 2010

Investors Flee Stock Market

At the top of this post you will find an image of Sunday's front page of The New York Times. I did a double take when I saw the headline: "In a striking shift investors flee stock market".

Underneath the front page image I have posted a chart showing monthly inflows and outflows to and from U.S. stock market (red bars) and bond market (gray bars) mutual funds.

Two things stand out on this chart.

First, money is flowing out of stock market mutual funds - a very unusual development. On a monthly basis it looks to me that outflows during the past three months have been greater than for any three month period since the March 2009 low. This is not surprising since the April-July drop in 2010 was twice as big as any other drop since March 2009.

Of course we already know that there is widespread bearish sentiment about the U.S. stock market. This information and the Times headline just confirms this judgment. It gives me confidence that the next big move in stocks from here will be upward.

Second, there has been an enormous inflow of money to bond funds. Since bond yields are at or near their historical low points I take this as a sign that an enormous bullish crowd (on bond prices, not yields!) has built up. I think this bond market crowd is similar to the stock market crowd that existed near the 2000 top in the stock market's internet boom. And I also think that we are very near the point where this bond market crowd will begin to disintegrate, thus sending yields higher and prices lower. I don't think we shall see U.S. bond yields this low again in our lifetimes.


  1. Exactly, and right on, Carl. I have made a tidy bundle on even my short term Bonds (Corporates, and Muni's)...I do not care about yields.....the underlying bonds have paid my bills and then some. I will be exiting over the next 12 months....and turning to the yield paying issues on the equities. Conversely, we will not have access to quality companies for the rest of our lives as we have now.

  2. I agree. Did you notice the recent cover of Fortune Magazine implying that Google is dead? This is getting very close to a buying opportunity. The rally up from last week's oversold conditions feels like it's fading out and setting up another quick move down. If that turns out to be the case, the long side will look very attractive.
    I enjoy reading your blog, keep it up!

  3. I agree that bonds are probably almost as low as they get in terms of yield - but how long can they stay there?
    The Japanese example says a long time.
    My guess is that it wont be such an easy trade shorting bonds. If you have 2 -5 years of patience, you will be right but who can sit through the 10% rallies and falls , paying bond borrowing costs for that long.
    As a result I would tread carefully on the short long bond trade and I am not bullish on equities.
    If we get a significant rise in usd jpy which is not caused by intervention, I would consider the short bond trade. Again with those two it is chicken and egg.

  4. "Since bond yields are at or near their historical low points I take this as a sign that an enormous bullish crowd has built up. "

    Carl, You really don't know what you are talking when come to Bonds. Please, don't just spend 10 minutes on the bond chart and decide the fate of the world. :)

    FYI, go read up David Rosenberg daily newsletter for free. Currently, just like 5% of Household asset are in any government bonds, compared to like 20%+ for Real Estate, and another 20%+ for stocks.

    Finally, demographic is finally shifting to bonds favor as Baby boomers are retiring.

    What makes you think stock market went up every year since 1980? Think Baby Boomer, and think what are they going to do now and in the long future.

  5. Shawn:

    I only wish I was as smart as you!

  6. How about this newpaper article today in the UK. Isn't this the opposite of the NY times headline? (It's the second I have seen in this vien by the way, in two days)
    Mortgage rates to reach 14% within two years.
    In UK most mortgages are floating and are priced of 3 month libor which is currently practically 0% currently.
    Talk about scare mongering. If we get that, we will get a decimation of the Uk housing market which is still trading on sub 5% yields and 5x income against a long term average of 3.5. It wont be recession if that happens, it will be full scale stagflation.

  7. Catherine: compare this one "In a striking shift investors flee stock market" with this one "Mortgage rates may hit 14pc within two years" and decide which headline will be taken serious by knowledgeable investors. One is stating evidence-based observations and one is just making things up to side with those who think interest rates must go up. But they will only go up if people buy and that wont be the case for some years...

  8. Carl,
    In one of your posts earlier you said it takes about 3-4 months for the headlines to have contrarian effect.... Does that mean that if this headline indicates bullishness in the market, it would not be going up until next 3-4 months?

  9. Carl,

    Do you want to mention Time magazine's cover about "Rethinking Homeownership"? Isn't it almost comical that they bring this now instead of 2004 when there was a bubble in the housing market? Surely a near-perfect contrarian signal.