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An Argument for Investors to Get Off the Sidelines

By Larsen Kusick, analyst, Phase 1 Investor
Monday, February 27, 2012

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.
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...
For long stretches, investors keep putting new money into the market... 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 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...
Money That
Went Into
Equity Funds
S&P 500
Russell 2000
Sept '10-May '11
$174 billion
April '09-April '10
$207 billion
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, 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.
Good investing,
Larsen Kusick

Further Reading:

With banks paying 0%, the government paying 2%, and corporate bonds barely beating inflation, Steve Sjuggerud reminds readers that money will flows where it's treated best. And right now, money is treated better in stocks than in any other place. In fact, we're seeing a never-before-seen extreme in favor of stocks. Get the details here.
Earlier this month, Steve's longtime friends – a pair of analysts with a fantastic track record – said it was time to buy everything. These analysts are not big risk-takers, but they're convinced we're looking at a bull market. Get the full story here: Three-Decade Market Veterans Tell Crowd to "Buy Everything."

In The Daily Crux
Market Notes
Silver Wheaton is up 34% already in 2012.
Foreign markets are breaking out... Germany, Japan, and Hong Kong are all at six-month highs.
Offshore oil services plays are quietly booming... fresh multi-year highs for Ensco, SeaDrill, and Oceaneering.
"Cheap, hated" defense company Lockheed Martin breaks out to a three-year high.
Market Watch
Symbol Price
S&P 500 1365.74 +0.2% +4.6%
Oil (USO) 42.01 +1.6% +7.8%
Gold (GLD) 172.23 -0.5% +26.2%
Silver (SLV) 34.37 -0.1% +10.2%
U.S. Dollar 78.36 -0.4% +1.3%
Euro 1.35 +0.6% -2.5%
Volatility (^VIX) 17.31 +2.9% -18.8%
Gold Stocks (^HUI) 541.90 -1.3% -0.1%
10-Year Yield 1.98 +0.0% -42.4%

World ETFs
Symbol Price
USA (SPY) 136.93 +0.2% +6.8%
S. Africa (EZA) 69.37 +1.4% +6.7%
S. Korea (EWY) 59.24 +1.2% +3.8%
Singapore (EWS) 12.80 -0.4% +3.3%
China (FXI) 40.16 +0.1% -0.6%
Lat.America (ILF) 48.47 +0.3% -2.7%
Taiwan (EWT) 13.35 +0.3% -3.5%
Japan (EWJ) 10.07 +0.2% -8.8%
Canada (EWC) 28.90 -0.3% -9.5%
Israel (ISL) 13.31 -0.4% -12.5%
India (IFN) 23.39 +0.0% -17.0%
Russia (TRF) 17.43 +3.6% -24.2%

Sector ETFs
Symbol Price
Retail (PMR) 24.25 -0.1% +23.9%
Utilities (XLU) 35.08 +0.4% +15.8%
Health Care (IYH) 75.37 +0.5% +14.8%
Big Pharma (PPH) 73.61 +0.6% +14.1%
Big Tech (QQQQ) 63.96 +0.4% +13.5%
Consumer Svcs (IYC) 77.25 +0.0% +12.0%
Real Estate (IYR) 60.75 +0.3% +8.3%
Biotech (PBE) 22.47 +0.2% +8.0%
Industrials (IYJ) 70.85 -0.1% +4.6%
Construction (PKB) 13.83 -0.6% +3.0%
Transportation (IYT) 91.65 -0.6% +2.5%
Defense (PPA) 20.10 +0.4% +2.5%
Telecom (IYZ) 22.55 -0.3% +1.9%
Software (PSJ) 26.54 +0.1% +1.7%
Water (PHO) 19.29 -1.2% +0.2%
Media (PBS) 14.79 +0.3% +0.1%
Insurance (PIC) 16.29 +0.0% -1.2%
Internet (HHH) 70.21 +0.1% -3.8%
Basic Mat (IYM) 72.47 -0.1% -4.3%
Financials (IYF) 54.88 -0.2% -6.0%
Semis (PSI) 15.76 +0.0% -10.3%
Oil Service (OIH) 121.00 +2.4% -11.4%
Nanotech (PXN) 6.65 -0.6% -33.7%
Alt. Energy (PBW) 5.93 -2.0% -44.0%

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