Negative Public Sentiment is an Investors Best Friend

11. September 2009 by Dan Walkow, CFA, CMT.

US mutual fund investors sold over 4 billion dollars of equity mutual funds over the last week. What did they do with the money? Invested it in bond funds of course, to the tune of 12 billion.

At the same time the US stock market, as measured by the Standard & Poors 500, rose 4% over the same period.

Investment returns on bonds are at multi-year lows yet retail investors would rather take miniscule investment returns so “THEIR INVESTMENT IS SAFE” or is it?

In my opinion investing in bond mutual funds could be one of the more risker trades at this junture. As the economy recovers, along with the demand for capital, interest rates will rise thereby pressuring bond prices and bond mutual funds in particular lower and perhaps much lower. NO SAFTEY HERE EXCEPT FOR VERY SHORT TERM BONDS.

Conversely when you study the Commitment of Traders Report (COT) it also shows that retail investors are fleeing the market while at the same time it shows that professional traders and investors are becoming more bullish. This makes sense. If retail investors are leaving the market but it keeps going up then somebody is buying more than enough to soak up the selling but enough to move the market forward by more than 4%.

Someone is wrong here and my money is on the institutional side as the opposed to the retail investor. This market wants to go higher!

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