Tuesday, February 28, 2012

Why Investors Should Get Off the Sidelines

The long trend in fear finally broke last month.
For seven straight months, investors ran from stocks. Month after month, they pulled money out of stock-based mutual funds [2].
But right now, the tide is turning. We're back at the beginning of the cycle. And we should see many more months of gains in stocks...
For years, I've been watching "the crowd" through the data on how much money is flowing into and out of stock-based mutual funds...
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For long stretches, investors keep putting new money into the market [3]... Then, months after the trend began, the market peaks. After stocks begin to drop, investors sell for long stretches... Then, months after that trend began, we hit a bottom.
Earlier this year I noted, "It's like watching the tide. There's no guarantee [4] the flow of money out of stocks will end this month or next. The important thing is to recognize where we are in this cycle."
Where we are right now, I believe, is at the beginning of a long period of investors pouring money into stocks, which will push stock prices higher.
Last month, investors pushed $16.8 billion into equity funds. That may sound like a lot, but it's a drop in the bucket compared to the $177 billion that rushed out of stock-based mutual funds since May 2011.
Some investors may feel like they missed the boat if they weren't buying at the bottom a few months ago. The truth is, investors almost never "catch the bottom."
And there are huge gains to be had following the trend. If history is any indication, we're likely to see a lot more money boost the market during the first half of 2012. Take a look at the last two bull markets...
Keep in mind, these performance numbers DO NOT assume you caught the bottom and sold at the top. This is how investors did if they bought at the end of the first month that "fund flows" went positive, and then simply rode the uptrend.
I don't expect stocks to go up in a straight line from here – trends always have dips. For traders, the market looks "overbought" right now, as my colleagues Jeff Clark and Brian Hunt noted recently.
Longer term, however, I'd be looking to buy over the next few weeks and months. The Russell 2000 returns show how small-cap stocks tend to do better than large caps during a bull market [5], so I suggest concentrating on that sector.
"The crowd" is just starting to wake up to the fact that the world isn't ending. History shows that these uptrends last for months as investors move their money back into stocks.
You should take advantage.

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