The markets are entering a blow off top.
For five years, by keeping interest rates near zero, the Fed has been hoping to push investors into the stock market. The hope here was that as stock prices rose, investors would feel wealthier (the “wealth effect”) and would be more inclined to start spending more, thereby jump-starting the economy.
This has not been the case.
From 2007-early 2013, individual investors fled stocks for the perceived safety (and more consistent returns) of bonds. During that time, investors have pulled over $405 billion out of stock based mutual funds.
The pace did not slow throughout this period either with investors pulling $90 billion out of stock based mutual funds in 2012: the largest withdrawal since 2008.
In contrast, over the same time period, investors put over $1.14 trillion into bond funds. They brought in $317 billion in 2012, the most since 20008.
Throughout this period, the market rose, largely due to institutional buying. Every time the market started to collapse, “someone” stepped in and propped it up. Consequently, institutional traders were not committed to a collapse, and gradually the market moved higher.
At this point the “mom and pop” crowd was, for the most part, not participating in the rally.
That all changed in early 2013. Suddenly the “crowd” began to get religion about the Fed’s monetary madness and piled into stocks. We’ve now reached truly manic proportions: thus far in 2013, investors have put $277 billion into stock mutual funds.
This is the single largest allocation of investor capital to stock based mutual funds since 2000: at the height of the Tech bubble. That year, investors put $324 billion into stocks. We might actually match that inflow this year as we still have two months left in 2013.
Indeed, investors are reaching a type of mania for stocks. They put $45.5 billion into stock based mutual funds in the first five weeks of October. If they maintain even half of that pace ($22.75 billion) for the remainder of the year, we’ll virtually tie the all-time record for stock fund inflows in a single year.
As a result of this, the market has entered a blow off top from a rising wedge pattern. You can clearly see the mania beginning to hit in the middle of 2013.
So, we have investor sentiment showing record bullishness, investors are piling into stocks at a pace not seen since 1999-2000: at the height of the Tech Bubble, earnings are generally falling, the global economy is contracting, and the Fed is already buying $85 billion worth of assets per month.
We all know how this bubble will burst: badly. It’s just a question of when. The smart money is either selling into this rally (Fortress and Apollo Group) or sitting on cash (Buffett). They know what’s coming and are waiting.
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Phoenix Capital Research