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Did Bill Gross Just Confirm the Bull Market?

How the bond baron's skepticism further justifies our contrarian stance

by 8/2/2012 7:45:44 AM
Stocks quoted in this article:

"The cult of equity is dying," says bond king Bill Gross in his recently posted market update. Could he be right? Sure, he could. But I can sum up my take on his comment in four words, "I love seeing this."

Let's get one thing straight -- we all make mistakes, and the bigger you are the more they are noticed. As you might recall, Bill Gross said to lighten up on your bond holdings last year, only to see longer-term bonds soar higher to end the year. Heck, I was on CNBC exactly one year ago today saying we were poised to rally, only to see the market entirely crack, and drop significantly the next few weeks.

Yet, here we are more than three years into a bull market that is up more than 100%, and it still looks incredibly healthy if you look at the internals. At the same time, we have incredible amounts of skepticism to back it up. Remember, markets don't climb a "wall of optimism," they climb that proverbial "wall of worry."

When one of the most influential bond guys ever says you don't want to own stocks, then contrarian bells should start ringing. My first impression is he is just talking his book. Of course he wants stocks to do poorly, as this probably means bonds will get some major interest.

Yet, if you read his full report, he is actually worried about bonds, as well. Then I got to thinking, this whole "Cult of Equity" as he calls it, died years ago. Let's just say the "Flash Crash" was the expiration date on that crowd. From the flash crash, to two 50% haircuts over the past decade, to Facebook Inc's (NASDAQ:FB) IPO, to the recent JPMorgan Chase & Co. (NYSE:JPM) and London Whale issues -- the average investor has left, and probably left a while ago.

Just look at the recent "fat finger" issues we saw after Knight Capital Group Inc. (NYSE:KCG) had some major problems. This is just another example of how Main Street feels the game is rigged, and without the same type of information, there is no chance.

With all of this said, here's a statement that simply hammers it all home -- the majority of investors have missed this rally, and that is why it's so hated. Think about this for a second, the Dow has been up an incredible nine of the past 10 months. Yet, equity mutual funds have seen outflows nine of the past 10 months!

Net New Cash Flow Since 2011

All in all, Bill Gross is simply saying what we've known for awhile now, and that is the retail crowd wants nothing to do with stocks here. My take is as long as the S&P 500 Index (SPX) stays above its upward trending 80-week moving average that Bernie touched on, it will pay to remain firmly in the bullish camp.


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