According to a recent report by Bank of America Merrill Lynch, recent inflows to stocks are leading to a contrarian sell signal. But is it really a buying opportunity instead?
Investors have been piling into stocks over the past twelve months. While the market as measured by the S&P 500 index is up 23.5% so far in 2013, are these inflows lighting up a contrarian signal for investors to get out while they can?
According to a recent report by Bank of America Merrill Lynch (BAML), $231 billion has gone into stocks this year compared to $16 billion for bonds. BAML says that if another $8 billion to $9 billion come into equity funds in the next two weeks, their models suggest a contrarian sell signal.
Flows to both stock and bond funds were tracking together until May, when Federal Reserve Chairman Ben Bernanke hinted the Fed would possibly taper its $85 billion per month bond-buying operation known as "quantitative easing". That taper talk led to a massive sell off in bonds, with some of that money going into stocks in what BAML has called "The Great Rotation". Ultimately, the Fed decided not to taper in September and its bond purchases look like they'll continue unabated for at least the short term.
Meanwhile, money continues going into equities. How intense have stock inflows been as of late? Data by TrimTabs Research show $54.2 billion going into equity funds for the month of October alone, the third highest inflows on record.
But, not everyone thinks these inflows are a bad sign. Andrew Busch, editor and publisher of The Busch Report, says it may still be a time to buy.
"I think it's a little strange that BofA is putting that out because the discussion has really been along the lines of the Great Rotation," says Busch. "If that's what's happening now, and you think it's a sell, you're asking for big trouble because, since 1951, when we've had a year that's been up [at least] 15%, 18 times in the following year it's gone up again."
"If you think you should be selling when everyone is buying, that works sometimes and really on a short-term basis," says Busch. "Overall, especially with stocks, when people are rotating into a sector, that's when you want to get into it."
However, Jeff Tomasulo, managing partner at Belpointe Alternative Investments, says there's reason to be concerned with the markets, at least in the short-term.
"We've had almost a two standard devotion move [in the S&P 500 index] in the last 14 sessions," says Tomasulo. "That's a lot of volatility coming into the market."
Looking at a chart of the S&P 500, Tomasulo sees the markets as hitting a critical point within a six-month trend channel. Should it break below this key support, Tomasulo believes the market could potentially see an even bigger pullback afterwards. But, that could be a buying opportunity.
What are the technical levels Tomasulo says is significant for the market at this time? And how does Busch think traders should use Tomasulo's trend channel? Watch the video above to see Busch and Tomasulo discuss what's next for the market.
More from Talking Numbers: