We have now seen three months in a row of money flowing out of equity funds.  Retail investors are reducing positions or eliminating positions all together. The immediate downside result of this is a lack of liquidity, which can make it more difficult to get out of a trade at a price you want. The upside is a that a gradual reduction in equity investment has a) not pushed equity values down and b) if some “event” does occur, the ensuing drop in equity values might well be minimal. 

The more important meaning of this money outflow is that folks are continuing to demonstrate an uncertainty about near-term market movement.  People have fear that a) the market will have lackluster growth, thus giving little in return for the risk taken, or b) the market will take a sudden and swift turn to downside.  So, to avoid the risk of either, people are putting their money in a bank or money market with minimal return, or, they are putting their money into bonds with minimal return, or, they are taking a bigger risk and putting their money into gold.  The latter seems less likely as yesterday gold hit a three-month low, which brings me to a point.

For a while earlier this year, gold was the hottest trade in town.  People could not get into it fast enough.  The trade was so hot that the “smarty pants” pundits were talking up gold so much you would have thought it had just been discovered. Some analysts were telling us gold was on the way to $1500, $2000, or even $5000 per ounce in the less-than-far-away future. I said it then, and I will tell you now, if you are listening to those folks in an environment such as it was then, you are making a big mistake.  Remember, it is the pundit’s job to sell you on the panic, and it is the analyst’s job to be wrong.  As it turned out, both did their jobs and they did them well.  If you had bought gold when it hit the peak, where would your money be today?

And what about today?  Where are we in relation to market movement?  As I said, the retail investor is moving money out, but those still in the market are trading the market up.  In fact, the S&P 500 is bumping up against its 100-day moving average and the VIX (Volatility index) is threatening to hold below its 200-day moving average.  Watching the market today, the S&P might not make it, but the VIX is holding strong.  I would love to see both break through their resistance, but, of the two indicators, I believe the VIX is the more important indicator for future market movement.  If the VIX holds, it means traders are betting more on the upside than the down.

In any case, these are still troubled times for the market.  The U.S. economy has hit a soft patch in its recovery, and now economists, pundits, and analysts are telling us that things will be “bad” for a while to come, yet this pessimistic outlook puts them at odds with the people I really want to listen to about our economic future – the CEOs of our largest companies.  Raising quarterly guidance and projecting stronger economic output for the 3rd and 4th quarters of this year is the kind of chatter that has meaning for me.   

Trade in the day; invest in your life …

Trader Ed