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Get ready to buy stocks.
You’ve heard the same message from my colleague Frank Curzio. He’s waiting for volatility to inch back. You’ve heard something similar from Jeff Clark as well. He figures the correction has run its course… and we’re due for an end-of-year rally. Even resource guru Matt Badiali is preparing to get back into the market. He’s waiting for the uptrend to get started.
Here’s the story…
Every month, Lipper, the research arm of Thomson Reuters, tracks how much money went into or out of different types of mutual funds. It’s a great indicator for gauging the “popularity” of stocks, bonds, and money-market funds.
Right now, stocks are as unpopular as they’ve been in more than two years.
Over the past few months, investors have ditched the stock market. According to Lipper’s numbers, more than $100 billion flowed out of stock-based mutual funds this summer. It’s the biggest three-month outflow since the end of 2008.
That bodes well for anyone looking to buy stocks over the next few months. Take a look at the chart below…
It shows Lipper’s data over the past three years. (I used a rolling three-month average to help smooth the data.) Each blue column shows the average amount of money that went into or out of funds during the previous three months. The black line shows the S&P 500 over that same period.
As you can see, the investing “herd” is always dumping money into the market at the exact same time that stocks are peaking. For example, at the end of March 2011, investors had put $97 billion into stock funds over the previous three months. The S&P 500 hit its peak for the year less than a month later.
More importantly for us today, the biggest gains in the stock market happen after investors have sold their holdings.
Before this summer, the last time investors were pulling money out of stock funds was August 2010. Starting on the last day of August, the S&P 500 posted a 27% gain over the following six months. That’s the best six-month performance it’s had in more than two years.
In 2009, investors continued pulling money out of the market until April. Those who started buying stocks as the tide turned made more than 20% in a few months using index funds. Dozens of individual stocks soared 100% or more by the end of the year.
Lipper won’t publish its numbers for September until later this week. But based on some weekly data points, September will almost certainly be the fourth-straight month that investors pulled money out of stocks.
There’s no guarantee that the market won’t head lower just as it did in late 2008. And investors could continue pulling money out of mutual funds. So there’s no need to rush in.
Last week, I showed you that you don’t have to “catch the bottom” to make double- or triple-digit gains. You just need to be ready to buy once a new uptrend forms. That’s almost certain to happen once the herd is done selling.
You need to be ready to buy stocks.
– Larsen KusickSource: Growth Stock Wire
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