Positive sentiment in the week through December 21 resulted in investors reversing course, with U.S. equities regaining favor and bonds experiencing selling pressure.

After an eight-month period of withdrawals from U.S. equity mutual funds, investors channeled $335 million into domestic equity funds, according to estimates from the Investment Company Institute. Prior to this inflow, a total of $90 billion was liquidated from these funds since the flash crash of May.

Inflows into foreign equity funds continued unabated with $3.6 billion finding a home abroad.

Interestingly, having seen inflows every week since the middle of December 2008, bond funds experienced outflows of $3.53 during the third week of December.

Source: Investment Company Institute, December 29, 2010.

The Bloomberg video below provides a summary of the of the mutual fund flow estimates. Click here or on the image to view the clip. (Please note that more text follows below the video image.)

Source: Bloomberg, December 30, 2010.

As usual with retail investors, it would seem that the change in strategy comes rather late in the cycle, with Treasury yields having bottomed in December 2008 and U.S. equities in March 2009. But the thinking is perhaps rather late than never, especially as the economy is growing again and the equity bull market, in the assessment of the masses, has not even been running for a full two years, whereas all 10 bull markets of the past 60 years made it into a third year (via MarketWatch). Additionally, there could be the hope that the third year of the presidential cycle will again be positive for stock markets.

These reason may have merit, but I will remain cautious until the overbullish and overbought condition of stock markets has been worked off through a short-term mean-reversion correction, which I believe is overdue (also see my post “Yes, stocks are overdue for a correction”.)

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