Investors Have a Love-Hate Relationship with US Stocks

There is no doubt that this stock market has reversed that very deep oversold condition that existed on June 4th.  You can see that in the chart below that shows the current overbought condition.  This does not mean that the rally cannot move higher, but it just means that the "easy lifting" has been accomplished, so now the stock market has to earn its way.  That's one reason we are guessing this sideways action has more time.

The next chart that came to our attention this week (from this link) is an amazing study of the 12-month rolling sum of net new cash flows into domestic equity mutual funds.

While this chart only dates back to 2002, it shows an amazing trend that really strikes a chord with us.  You can see the peak in buying in US domestic equity mutual funds in April 2004.  The stock market continued to make a high, but if you remember, the entusiasm at that time was focused on the huge speculation that was occuring in commodities and in the new international stock markets.  The above chart moved into a negative posture in 2007, just as the stock market was making new highs, but already the bank stocks, consumer spending, and house prices were starting to decline.

Looking to the most recent (May 2012) statistics, we now have the most negative liquidation of domestic stock mutuals funds of any time in the history of the above chart.  Depressing huh?  Well, not really...  If you look at this chart in retrospect, and see how that 2007 period started filling up the cash deposits again, you know that reservoir of potential buying power is overflowing.  Buying in 2004 or in 2007, when some headlines were at their happiest, was certainly not good theory.  However, you can see the huge increase in stock prices from that prior trough in this measure in 2009.

Professional investors, such as ourselves, and many others have been swimming against this negative current.  However, we believe that the next few years will reverse this downtrend, but it just hasn't happened yet.

Don Hays

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