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The Most Important Trend to Watch in 2012

By Larsen Kusick, analyst, Phase 1 Investor
Monday, January 9, 2012

One of the market's most important sentiment indicators is inching closer to buy mode...
According to research firm Lipper, investors have been pulling money out of stock mutual funds for six-straight months now.
To understand why this trend is so important, consider the amount of money involved...
Since the beginning of June, investors pulled a total of $152 billion out of stock-based mutual funds. That's the biggest round of selling in a six-month period since March 2009. Back then, investors responded to the financial crisis by pulling $188 billion out of stock-based mutual funds.
Looking back, March 2009 turned out to be the best time in decades to buy stocks. From the end of March 2009, the S&P 500 gained 40% over the next year. Riskier small-cap stocks, measured by the Russell 2000, surged more than 60% over the next 12 months.
The other notable fact about the selling trend: it's the longest streak we've seen since the six months ending in December 2008. Although the stock market swung wildly for a few more months, investors who were willing to buy at the start of 2009 made a fortune.
Over the long run, it pays to buy when "the crowd" is selling. Take a look at the chart below. It shows the mutual fund "flow" data since mid-2008. (I used a rolling three-month average to smooth the data.)
Mutual Fund Flows Since Mid-2008
You can see the cyclical nature of investor sentiment toward stocks. Investors pulled hundreds of billions of dollars out of the stock market during the financial crisis. Once the selling was exhausted, the market rallied.
In 2010 and early 2011, investors fell in love with stocks again, pouring hundreds of billions of dollars back into stocks. After buying peaked in April, the S&P 500 fell more than 15%. (International stock indexes did much worse.)
Money goes into stocks, money comes out of stocks... It's like watching the tide. There's no guarantee 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.
Sooner or later, investors will start shifting back into stocks. Once the cycle shifts back into bull mode, you can bet on double-digit gains in the market – and even triple-digit gains in riskier small-cap stocks.
Of course, "the crowd" will end up buying AFTER the market has spent months moving higher.
Good investing,

Further Reading:

Since Larsen last wrote about mutual fund "flows" in October, the selling has lessened... But remember... "you don't have to 'catch the bottom' to make double- or triple-digit gains. You just need to be ready to buy once a new uptrend forms."
"In uncertain times, you want to invest in the surest thing possible," Larsen's research partner Frank Curzio says. "But when factoring in inflation... placing your money in 'safe-havens' like cash or Treasurys will make investors lose money over the long term." He says the best place to invest in 2012 is in small "picks and shovels" plays...

In The Daily Crux
Market Notes
Cash is king... U.S. dollar index touches its highest level in over a year as the euro plunges.
Lots of big tech giants are sitting at or near one-month highs... including Apple, Google, Microsoft, and Cisco.
Bakken shale players Whiting Petroleum and Magnum Hunter break out to four-month highs.
Homebuilders are in a "stealth" boom... Beazer and Pulte rocket more than 80% in three months.
Market Watch
Symbol Price
S&P 500 1277.81 -0.3% +0.3%
Oil (USO) 39.22 +0.1% +4.1%
Gold (GLD) 157.20 -0.4% +17.5%
Silver (SLV) 27.91 -2.1% -1.8%
U.S. Dollar 81.25 +0.4% +1.3%
Euro 1.27 -0.5% -2.3%
Volatility (^VIX) 20.63 -4.0% +18.6%
Gold Stocks (^HUI) 517.66 -1.0% -2.6%
10-Year Yield 1.96 -1.5% -42.7%

World ETFs
Symbol Price
USA (SPY) 127.71 -0.3% +2.4%
Canada (EWC) 26.90 -1.0% -10.9%
S. Africa (EZA) 61.28 0.0% -12.2%
S. Korea (EWY) 52.19 -2.2% -14.1%
Japan (EWJ) 9.07 -1.1% -15.4%
Lat.America (ILF) 43.10 -0.7% -16.9%
Singapore (EWS) 11.09 -0.8% -17.0%
China (FXI) 35.17 -1.5% -18.5%
Taiwan (EWT) 11.83 -0.6% -19.4%
Israel (ISL) 12.72 -1.0% -22.2%
India (IFN) 19.60 -0.6% -40.1%
Russia (TRF) 13.96 +0.0% -42.3%

Sector ETFs
Symbol Price
Retail (PMR) 22.28 -0.6% +18.9%
Utilities (XLU) 35.02 -0.5% +16.0%
Big Pharma (PPH) 72.75 -0.3% +14.1%
Health Care (IYH) 72.41 +0.1% +10.6%
Consumer Svcs (IYC) 72.45 -0.1% +7.8%
Real Estate (IYR) 56.83 -0.2% +6.0%
Big Tech (QQQQ) 57.81 +0.4% +4.4%
Industrials (IYJ) 64.98 -0.1% -0.1%
Transportation (IYT) 90.31 -0.1% -1.1%
Defense (PPA) 18.42 +0.1% -2.8%
Internet (HHH) 70.21 +0.1% -3.6%
Media (PBS) 13.52 -0.6% -4.3%
Biotech (PBE) 20.58 +0.9% -4.7%
Insurance (PIC) 15.13 +0.0% -6.5%
Construction (PKB) 12.20 -0.2% -6.8%
Software (PSJ) 23.22 +0.7% -8.2%
Water (PHO) 17.21 -0.6% -8.3%
Telecom (IYZ) 20.88 -0.2% -8.7%
Basic Mat (IYM) 66.52 -0.3% -12.1%
Oil Service (OIH) 117.30 -0.2% -12.8%
Financials (IYF) 50.30 -0.4% -13.0%
Semis (PSI) 14.13 -0.8% -15.4%
Nanotech (PXN) 6.14 -0.2% -38.8%
Alt. Energy (PBW) 5.22 -0.4% -50.0%

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