Market signals: Risk trade is gathering steam but beware some signals

by Wayne Ferbert on February 7th, 2013

The markets are off to a great start in 2013. And like we wrote in an earlier post, the new year is a great time to consider re-balancing your portfolio. The asset classes running up would get trimmed back and you re-invest in the under-performing classes. Check that post out here.
In a broad market rally like this, institutional investors refer to this as the ‘risk-on’ trade. It means that everyone is pushing their chips to the center of the table and looking to participate in the run-up. Equities represent the ‘risk’ asset class.
And so far in this rally in 2013, the riskier equity groups are out-performing by a small margin. Mid-cap and small-cap have out-performed the large cap US stocks by 2% and 1%, respectively. A meaningful amount given the small time window but since it is a small time window, we won’t come to any specific conclusions on such a small time window.
We have seen a tremendous inflow to equity mutual funds in the first 4 weeks of the new year. According to Lipper, the net inflows of $20.7 billion dollars in the 4 weeks ending January 30th represents the largest 4-week net inflow since the reading on April 12, 2000. This alone has got to concern you. The four weeks ending April 12, 2000 was the absolute worst time to put your money in the market. The market peaked at that point, corrected for 6 months, re-gained this peak for a week, then started a multi-year march downwards, and then never re-gained those levels until October 2007. Just now, the market has re-gained those same levels after the ‘08/’09 market crisis.
We know that mutual fund flows are usually late to the party. We’ll see if that is the case this go around. We also know that when a lot of money flows to a market, it will bid up the prices. Our biggest concern: Given the continued luke-warm earnings results, it is difficult to be buying in to this market with new money right now. However, it is a great opportunity to re-balance your portfolio.
REMINDER: Re-balancing your portfolio is a way to harvest profits and stay invested in the market at the same time!

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