Bull or Bear?

Over $22 billion flowed into equity mutual funds and ETF’s this past week according to Bank of America Merrill Lynch. That was the second highest amount on record after the $22.8 billion that flowed into equity funds in September 2007. Is this a sign of the bull or bear?

Of this $22 billion inflow, $8.9 billion went to equity mutual funds, the biggest weekly influx in 12 years. It should be no surprise that equity mutual funds are “John Q Publics” investment of choice for their IRA’s and 401K’s.

With the S&P 500 jumping 13% in 2012, posting its biggest gain in 3 years, it looks like “John Q Public” may be ready to get back in the game.

At first glance this new development is certainly a positive sign. The “Fiscal Cliff” is over right? As far as “John Q Public” is concerned it is. The Debt Ceiling, Sequestration, and the expiration of the CRA are just headaches for the government right? After all, the housing market and bank stocks are showing signs of a recovery so this has got to be the end of the “Great Recession”!

After getting burned twice in the last 12 years “John Q Public” is sitting on a lot of cash and bonds. With stocks rising and growing fears of a Bond Bubble it shouldn’t be surprising to see renewed interest in the stock market. “John Q Public” is no dummy! (Tongue in Cheek) He may have gotten hammered with the “Dot Com Bubble” and then again with the “Housing Bubble” but he’s certainly not going to get slapped again with the “Bond Bubble”.

But what happens when “John Q Public” is fully invested in the stock market and the cash well runs dry? If corporate earnings keep up with the rising market, a normal correction should take place when momentum slows and volume begins to drop as the “Pro’s” take profits. The question will then be, does “Buy and Hold John Q Public” get cold feet and start heading for the emergency exit?  If so, you better have your running shoes on.

From a technical perspective this could be a set-up for the “Perfect Storm”. We are currently in an aging 3 year cyclical bull market but still firmly stuck in a secular bear market which began in 2000.

The annual chart oscillators indicate we are entering the 4th quarter of the secular bear market suggesting we may still have several years before we finally turn the corner.

The rise in the quarterly and monthly chart oscillators are beginning to get a bit long in the tooth suggesting we may see another cyclical bear market before the new bigger bull trend takes root.

What is particularly discerning is that the last time we saw such a large inflow into equity mutual funds was September 2007. The time before that, was in the year 2000.

The stock market dropped 48% from March 2000 to October 2002 and 55% from October 2007 to March 2009.

One thing for certain, “John Q Public” is always the last one to show up to the party, the last one to leave, and unfortunately suffers the biggest hangover.

In the near term I’m looking for a pull-back entry point driven by “Fiscal Cliff Part 2”. Then if “John Q Public” continues to pump money into the market it should be a smooth ride up through mid-Spring. After that, watch for momentum to slow and volume to drop while keeping a firm hand on the rip cord.