Thursday, July 24, 2014

Equity Market May Simply Be Under Owned

It seemed odd that back in May we posted an article that said sentiment data may be suggesting the equity markets were oversold. At that time the equity markets really had not sold off but had pretty much traded sideways around the S&P 500 level of 1,878. What prompted our comment was the fact bullish individual investor sentiment had declined to 28%, which is one standard deviation below its long term average. Since the time the article was published, the S&P 500 Index is up nearly 6%. Well, today the American Association of Individual Investors reported their weekly sentiment survey data and the results show individual investor bullish sentiment has once again declined to 29.6%: near the minus one standard deviation below the bullish average. Maybe the equity market is not oversold, but more under owned.

From The Blog of HORAN Capital Advisors

The below chart of monthly mutual fund flows shows fund flows into equity funds is increasing at a decreasing rate. Additionally, the red bars show flows into fixed income funds remain steady and maybe even beginning to increase. This fund flow data seems to be anecdotal evidence that investors do not believe in the sustainability of this equity rally.

From The Blog of HORAN Capital Advisors

Even the level of assets in money market mutual fund assets has remained relatively steady as noted in the below chart.

From The Blog of HORAN Capital Advisors

We have probably stated at ad nauseam, as have many other market prognosticators, that the equity markets seem overdue for a correction. The difficulty with the correction belief is the fact market corrections rarely occur when the majority of investors have this same viewpoint.

Investors should use this point in time to evaluate their investment assets to assess where they are over or underweight in certain investments or investment categories. Reducing overweight positions is not necessarily a bad strategy at this point in the market and economic cycle. Reallocating into undervalued segments, even alternative investments that may perform better in a market correction, is not a bad strategy. Investors should keep in mind though that recently reported economic data seems to indicate a pretty good economic climate. Scott Grannis published an article a few days ago noting a number of positive economic data points, Recovery Rests on Solid, not Liquid Ground. It is just possible this market will continue to climb that so-called "wall of worry."

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