One of the primary themes for this letter over the last few months has been the potential of a major market top forming. We now have what I can only call “numerous bells” ringing.
First and foremost, I want to alert you to a disturbing trend in stock mania. That trend pertains to money inflows to stock mutual funds.
One of the best means of gauging investor sentiment for individual investors pertains to how they move their money in and out of mutual funds.
For example, from 2007 until the end of 2012, investors pulled over $405 billion out of stock based mutual funds. Over $90 billion of this was pulled in 2012 alone: the largest withdrawal since 2008.
In contrast, over the same time period, investors put over $1.14 trillion into bond funds. They brought in $317 billion in 2012: again, this was the most since 2008.
This marks quite a reversal of asset class fund flows: before 2008, stock funds usually took in $2 for every $1 investors allocated to bond funds.
However, this trend reversed back to normal in 2013. The Fed finally succeeded in inducing investors to move into stocks again. And they have done so in a big way. Thus far in 2013, investors have put $277 billion into stock mutual funds.
This is the single largest allocation of investor capital to stock based mutual funds since 2000: at the height of the Tech bubble. That year, investors put $324 billion into stocks. We might actually match that inflow this year as we still have two months left in 2013.
Indeed, investors are reaching a type of mania for stocks. They put $45.5 billion into stock based mutual funds in the first five weeks of October. If they maintain even half of that pace ($22.75 billion) for November and December, we’ll virtually tie the all-time record for stock fund inflows in a single year.
That record, again, occurred in 2000. At that time the NASDAQ had just staged a massive bubble rally.
What followed was one of the worst market collapses of all time:
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