Bear Necessities

In the WSJ’s blog MarketBeat,
Scott Patterson points to a few interesting analyses in a post, Bear Necessities.

First up,  Ned Davis Research on Mutual funds purchasing of stocks:

"Mutual funds have been pouring money in stocks — and that could be a bad thing, says Ned Davis of Ned Davis Research. In January and February, investors tracked by research outfit [NDR] put $16.39 billion into domestic equity mutual funds. But the funds only spent $4.3 billion of that amount on stocks. In March, investors put $15.6 billion into domestic equity mutual funds, and the funds stashed the entire amount, plus another $4.4 billion, into U.S. stocks.

More than $10 billion of the inflows went into growth funds, more than twice the amount that went into bond funds, a sign of heightened risk-taking.

"Historically, we have found that the ratio of money going into stocks versus bonds to be a fair measure of speculation," Mr. Davis wrote in a Wednesday research note. He says the data is "unfavorable" for stocks, "especially since inflows tend to peak in April."

Next up, MarketBeat looks at a specific technical indicator: % of stocks trading above their moving average:

"Phil Roth, technical guru at Miller Tabak, has more bad news. The percentage of stocks trading on the New York Stock Exchange above their 200-day moving averages hit 67% Monday, one of the lowest levels in years (it recently peaked at 91% in January 2004), one of the lowest levels in years (it recently peaked at 91% in January 2004), which shows that one-third of the stocks changing hands on the NYSE are "in bear trends."

While the benchmark averages may continue to meander higher, "very good stock selection is needed to outperform the market meaningfully," wrote Mr. Roth in a Wednesday note."

Interesting stuff . . .

UPDATE: May 4, 2006, 10:34am

I dug up a chart on fund flows:


Source: Sentiment Trader via Kirk Report


Bear Necessities
Scott Patterson, MARKETBEAT
WSJ, May 3, 2006 3:15 p.m.

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What's been said:

Discussions found on the web:
  1. hbt commented on May 4

    Each Wed. IBD publishes the values of a few “Psychological Market Indicators” (p.18). Similar to NDR’s emphasis, IBD notes that the ratio of Mutual Fund Share Purchases to Redemptions (x- money market) has been trending at a 5 year high for the last two weeks: this week’s value is 1.41 vs. last wk’s 5yr-high of 1.44. The 5yr low occurred in the first week of July ’02 at 0.9.

  2. Paul Hickey commented on May 4

    Since 10/9/02, the percentage of stocks on the NYSE trading above their 200-DMA has been at or below 67% on over 55% of the days. So according to the research at Miller Tabak, the market has been in bear mode for 55% of this bull market. Someone didn’t do their homework.


    BR replies: October 2002 was the bear market lows, so its no surprise that so many stocks were below their 200 day ma

    Phil Roth’s data begins with the bull high in 2004, and traces the move from then on

    Back in 2002, you’d have more stocks below their 200-day average, pretty much what you would expect for a move off of the lows.

    Roth also isn’t saying the entire market is in bear mode – just that more stocks are in bear mode now than before. He also points out that that doesn’t mean the “market” will fall or stall, just that’s it’s getting harder for the major averages to rise.

    That’s consistent with a narrowing rally as the topping process continues . . .

  3. B commented on May 4

    Oh, but all is well. The Transports when up 110 points in 15 minutes this morning. And some guy over on Forbes is telling us to buy all of these stocks at 3x their historical median PE TODAY.

    I’m quite confident there’s an underlying force to the Transports. Secretly, I have heard all of these companies have a $10 trillion contract to build a transport mechanism to some interstellar planet similar to what was done in the movie Contact. And, the building materials are almost all copper and paladium. Funny, with all of our technology, there seems to be some new development in oil that is going to fuel this device. I’ve heard it will take half of the world’s oil reserves as well. Therefore, I’m expecting the cumulative PE of all of these stocks to expand to a mere 10,000 while the dividend yield doesn’t matter any more. Btw, it’s going to be financed by American banks, with the most paltry dividend yield in years. Time to back up the truck.

  4. Gordon Haave commented on May 4

    The money pouring into growth stocks would certainly indicate an increase in speculation. This should not be a surprise… as economic expansion continues, people should theoretically feel less risk adverse, and we do in fact see this in most economic cycles… growth stocks increasing towards the end of the cycle.

    What I would take away from all of this is not that this is a sign that one should take to mean that the market will decline anytime soon… after all flows of funds can drive the market significantly, and money is flowing into stocks.

    Rather, I would take this to indicate the long awaited outperformance of Russell 1KG vs. Russell 1KV.

  5. thecynic commented on May 4

    i’m sure Paul Hickey has some solid data but his point also shows how narrow the advance has been. if you don’t benefit from inflation you have lagged. i thought it was interesting that the markets were looking unch’d on the open with the dollar stronger and commodity prices easing on no hike from ECB. when ECB comments came out hawkish, dollar falls against euro, gold spikes and stocks soar. but there’s no inflation….

    another interesting tidbit on market dynamics. (have to give disclaimer: i was given heads up from elliott wave) margin debt at NYSE is at the same level as 12/99. the top for margin debt was 3/00, the bottom in debt levels also was 9/02 a month before the 10/02 low. the chart of margin debt levels looks very similar to the nominal price of the Dow. doesn’t mean can’t go higher but clearly getting elevated. who knows if relevant, but interesting.

  6. Twinkie commented on May 4

    You’re finally talking sense B, only you don’t realize that the rails will be forged from solid gold, that Cheney and John Snow will be the test pilots and that they’ll fuel this machine with salt.

    I’m long salt. How about you?

    Yeah… back up the truck brother.

  7. B commented on May 4

    I agree with you cynic. In reality Paul’s data is likely correct without validating it. And, he has, in effect, provided facts that seem to be illogical but they aren’t. The remainder of 2002 was a bust. Half of 2004 was a bust. The first four months and the middle three months of 2005 were a bust. So, other than the leaders in this cycle, homebuilders, broker/dealers, transports, metals and mining he is indeed correct. And they were spotty at times. It’s anecdotal but surel looks like the fifth wave in all of those sans homebuilders which peaked long ago. We have been in a market of mailaise or declining prices nearly 50% of the time. Especially the Naz.

  8. drey commented on May 4

    As many here have pointed out, the leadership and breadth of this late stage bull market is questionable to say the least, and despite all the new highs, the spare change I tossed into a bear fund (inverse S&P with a 1.5 beta) a month and a half ago – St. Paddy’s Day to be exact – is above water as of yesterday’s close…

  9. Michael C. commented on May 4

    >>>Oh, but all is well. The Transports when up 110 points in 15 minutes this morning. And some guy over on Forbes is telling us to buy all of these stocks at 3x their historical median PE TODAY. <<< If my calculations are correct, EXPD is reponsible for about +75 of the +145 points in the DJTA today.

  10. Bynocerus commented on May 4

    Here’s a question: At the close yesterday, if you were in an NDX index fund, you hadn’t made any money in 5 months. Given that the market hasn’t really gone anywhere with all the money pouring in to these mutual funds, what happens when that in flow dries up?

  11. SLN commented on May 4

    My data shows Roth’s 200 day MA data is bad. Although he gets the current and high right, the “one of the lowest level in years” flat wrong. It was lower for much of 2004, during the spring of 2005 and near the end of 2005. In fact, the 67 is near the July 2005 52 week high of 72. Ironically, the measure is above its own 200 day MA and has been since the beginning of the year…

  12. Michael C. commented on May 4

    >>>My data shows Roth’s 200 day MA data is bad.<<< I agree. Where does he get that the % of NYSE above the 200MA is at its lowest in years? Look at the chart (expressed nominally & not percentage but the chart would look the same in both cases):$NYA200&p=D&yr=3&mn=0&dy=0&id=t90355209069&r=2352

    We are actually near the HIGHEST level in 2 years. And Bynocerus above is right in saying we were a lot lower a number of times in the last 2 years. How could Phil Roth be so wrong? Or are you misquoting him BR?

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