Monday, January 28, 2013

The Individual Investor Is Back--Only to Be Walloped Again?

After withdrawing more than four hundred billion dollars from equity mutual funds over the past several years, mutual fund investors in the last several weeks have made the largest purchases of equity funds in years.  

If investors are moving funds from bonds to stocks, I understand the motivation.  Bonds have been in a bull market for more than thirty years, while stock markets have been challenging over the past 10-13 years.   Most bond funds have negative returns in this first month of 2013, and I expect relatively modest returns--or even losses--from bonds ahead.  But to move from cash to stocks now, after a more than doubling in stock market returns over the past four years, I wonder whether mutual fund investors are again chasing performance, as they did in 2000 at the multi-decade peak in the stock market or in 2007 and 2008.

I consider most stock markets to be quite risky for new buying at this moment.  Sentiment and technical measures reflect an extraordinarily overbought market with excessive enthusiasm and little regard for risks that might arise.

There are some exceptions.  Some individual stocks remain attractively priced, such as Fresh Del Monte (FDP), Alliance Grain Traders (AGXXF), and Vodafone (VOD).  I also continue to think that gold and gold stocks (or the GDX exchange-traded fund) are one of the few depressed areas left in the market, along with instruments linked to volatility (such as VIXY).  Otherwise, I strongly think it is a time to realize some gains and step back for a breather.

Steve Lehman

S & P 500:  1500
FDP:  26.1
AGXXF:  13.2
VOD:  27
GDX:  41.6
VIXY:  12.65

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