Editor’s note: At Chaikin Analytics, we’ve talked a lot about the bull market in stocks…
The benchmark S&P 500 Index is up roughly 26% off its October 2022 bottom. And the tech-heavy Nasdaq Composite Index has soared even higher. It’s up around 37% since late December 2022.
But as our friend Brett Eversole explains today… the stock market rally is far from over.
Regular readers know Brett watches the markets closely. He’s the editor and main analyst for True Wealth and its related publications at our corporate affiliate Stansberry Research.
To that point, Brett first published this essay in his free DailyWealth e-letter earlier this week. In it, he details why an inevitable shift in the markets is a big reason to stay bullish on stocks right now…
Tell me what stocks did last week… and I’ll tell you how sentiment will look this week.
It’s not always that simple. But this idea is more correct than most people like to admit.
With the market’s massive turnaround from 2022, both individual and professional investors are getting more excited about stocks. But that sentiment reversal doesn’t mean folks are buying stocks hand over fist.
In fact, funds only started flowing into stocks in June. And that trend didn’t last. Funds have flowed out of stocks since then.
Meanwhile, fund flows into bonds continue to soar.
When you put it all together, you start to realize investors might not be as bullish as they let on today. And that means the latest stock market rally still has room to run…
You can measure market sentiment in two ways…
You can survey folks on how they feel. Or you can look at what they’re really doing with their money.
Surveys are better than having no indicator at all. But humans have a bad habit of saying one thing and doing another. So “real money” indicators are always the better choice.
One of these indicators comes from the Investment Company Institute (“ICI”). Among other things, this trade group collects data on mutual funds and exchange-traded funds (“ETFs”).
One metric the ICI tracks is the net fund flows of mutual funds and ETFs. It can measure the money flowing in and out of both stocks and bonds through these investment vehicles.
U.S. stock fund flows turned negative in mid-2022. And they’ve mostly been negative since then. In fact, one of the biggest outflows in recent years happened in May.
June was the only exception. That month, $7.5 billion flowed into stocks.
But that trend didn’t continue. Take a look…
With the bear market in full force last year, investors started pulling money out of stocks.
Sentiment has partly turned around since then. But folks still aren’t pouring money into the stock market…
In July, investors withdrew $1 billion from stocks. And they yanked out more than $16 billion in the first three weeks of this month.
Clearly, investors aren’t going all in on stocks just yet. That’s probably because they’re still buying bonds like crazy. Below is the same chart – but for bonds. Check it out…
Investors spent nearly all of last year pulling money out of bond funds. But 2023 has been a different story…
With interest rates rising, everyone realized how much they could earn in fixed-income investments. So they started piling into bonds.
Bonds have experienced positive fund flows in every month in 2023. Folks have pushed nearly $174 billion into these funds this year.
Between both charts, we see a clear trend…
A lot of folks say they’re getting bullish on stocks. But they sure aren’t acting like it. Instead of pouring money into the stock market, they’re still piling into safe bonds.
This trend won’t last forever, of course.
Once folks start putting their money where their mouths are, we’ll see a flood of money into stocks. And as that happens, stock prices will likely soar to new heights.
This setup is waiting to unwind. And that inevitable switch is a big reason to stay bullish right now.
Good investing,
Brett Eversole
