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More Proof That This is One Hated Rally

Schaeffer's Senior Technical Strategist Ryan Detrick takes a closer look at what domestic mutual funds and bonds say about the market

by 10/5/2012 7:55:15 AM
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One of the more amazing stats you'll hear is the Dow Jones Industrial Average (DJI) is up 11 out of the past 12 months, while domestic equity mutual funds have seen outflows the past 17 months, according to the Investment Company Institute (ICI). You want to talk about hated rallies, I think right there is a good reason so many hate it -- they simply missed it.

Last month, I cited a Franklin Templeton study that showed most investors actually think the market has been down the past three years. The disconnect between what people "feel and see" versus reality is amazing. A lot of smart people who have been doing this a lot longer than me say it has never been further apart. Turn on the TV, and all you hear are worries and concerns, yet we have a Dow that is up 11 of the past 12 months and is pretty close to new multi-year highs! Incredible, really.

If you've followed Schaeffer's Investment Research over the past few years, then none of this should be new. In fact, we've been saying for more than three years now that the market is going higher simply because expectations are so incredibly low. What's amazing is now with new highs in sight, we still see signs that very few believe in this rally. That, my friends, is reason enough for me to expect the rally to continue.

Clear back in February, I looked at fund flows and determined that the data suggested a move higher. I summed it up with this:

As the market continues to make new highs and confidence slowly comes back, there are still enormous amounts of cash on the sidelines, which could continue to push this bull market much higher for a very long time.

Fast forward eight months, and not much has changed. In fact, in September we saw more money pour out of domestic mutual funds and move into bonds. About $15 billion left domestic mutual funds, marking 17 straight months of outflows. The previous record was 11 straight months back in 2007 and 2008.

Chart of SPX Versus Domestic Equity Flows since January 2008

The flip side is that another $30 billion or so went to bonds.

Chart of SPX Versus Bond Funds since January 2008

Where things get really interesting is when you look at the 12-month cumulative flows. The quick-and-dirty summary is that over the past 12 months, about $150 billion have left domestic equity funds, while about $275 billion moved to bonds.

Chart of SPX Versus 12-Month Domestic Equity Flows since 2000

Chart of SPX Versus 12-Month Bond Funds Flows since 2007

Below is a nice chart that combines the two, and you can see we are close to a record difference between bond inflows and domestic equity fund outflows over the past year. Taken in context of how strong the overall equity markets have been, it's simply amazing.

Chart of SPX Versus 12-Month Domestic Equity and Bond Funds Flows since January 2008

In conclusion, I'll just hit rewind and re-write what I said back in February, because virtually nothing has changed, and it's still 100% accurate:

As the market continues to make new highs and confidence slowly comes back, there are still enormous amounts of cash on the sidelines, which could continue to push this bull market much higher for a very long time.

Here are some additional articles of interest:

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