Late In The Game

Investors poured over $20 billion into equity mutual funds & ETFs in the first week of January, one of the highest inflows on record. Many sentiment indicators I look at are approaching extreme levels of bullishness although are not quite there yet. Anecdotally, I am seeing a  lot of bullishness out there. These are not the conditions I prefer to invest under.

There is very little worry out there even though we are about to see the largest tax hike in decades. While one can argue that the tax hikes on the rich will not effect the economy, the payroll tax hike will hit everybody and will be an incremental negative. There will also likely be cuts in government spending come March. Its possible that the economy will continue to chug along despite these headwinds but this is not a time that I want to make big bets.

I have been reducing my long exposure and am now only very modestly net long. I don't generally play for the last few percent of a rally and that is where I believe we are. Have  a great weekend.

1 comment:

frank r said...

That first week mutual fund flows might reflect delayed 401K contributions from last year or anticipated contributions from the first quarter of this year or who knows how they do their bookkeeping. I'd be much more interested if the second and third weeks of january show similar big inflows.

What I know is that I fail to see what has materially changed since Aug/Sept of 2011, when the SP500 dropped to 1074 on the intraday or June of 2012 when it dropped under 1285 or thereabouts. Which is why I've been under my baseline since October 2012 and see no reason to buy until prices fall back to under 1200 plus 6%/year since Sep 2011 (which would be under 1300 now). And even that is hardly cheap based on normalized earnings, though I'll buy back to my baseline at that level just because there is nothing better and ZIRP may go on forever.

If you overpay by a mere 10% in a world where real stock returns are about 4% (and even that is optimistic on an after tax basis), you've just thrown away over 2 years of returns for that mistake. I don't think people appreciate that. Overpay by 20% and you've thrown away almost 5 years. Not that I have any idea as to precisely what stocks are worth so as to be able to say they are exactly 10% or 20% overpriced, but I am acutely aware of how dangerous they can be if one overpays.