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  • Writer's pictureOwen

Are you a "dumb money indicator"?

Experts and average investors look at market rallies very differently. 

Professional investors are always wondering when it will end, By contrast, weekend experts are telling their friends “look how much I made in stocks! You should get in too!  It’s so easy!”. 

It is a market truism that equity funds and ETFs see the most money flow in from average investors just before the market starts falling.

This comes from the mentality from many investors that "I have to wait until it is safe to invest." This judgement is made because the market has been steadily heading up for a couple of years, so things feel safer.

If you are thinking the market top might be soon, some new evidence today to support your case.  This year has seen the biggest inflow of money into equity funds since the end of the bull run in 2000.  And if you know your bull runs, 2000 was a real doozy.

In 2000 the market wide price-earnings ratio for the Nasdaq reached 102. For context the market wide PE is usually between 10-20 with an average about 15-16 . Usually, 30 is considered extremely high so 102 is well past nose-bleed valuations levels.

Yet in early 2000 average investors were launching into the market.

As one commentator in the article pointed out…

“The timing of retail investors tends to be terrible,” said Jonathan Pond, an independent financial adviser in Newton, Massachusetts, who oversees $200 million. The deposits may be a contrarian indicator of a market near a top, he said.

That’s not to say a run to bonds is a good idea. If the taper talk turns out to be true, and sooner or later it will, then bonds will do very poorly. Interest rates have to normalize at some point, (i.e. go up) and with that, bond prices must go down. 

It could be an ugly rush for the exits too since every large pension fund and professional hedge fund manager knows this too, so the allocation to equities may be less about hope and more about a perceived lack of options.  Not the greatest endorsement for a continued bull run.

This is all true of the American market, but sometimes analysts state-side forget there is a big wide world out there.  For average investors it is important to remember that recent good performance increases the risk the longer it continues.

The inverse is also true, so be on the look-out for a market rout that continues for a year or more. That could be your opportunity.

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