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Rush into U.S. equities surpasses dot-com bubble record

Here's a statistic that should make bullish stock market investors get sweaty palms: the inflow of money into U.S.-listed equity mutual funds and ETFs in January reached a record high.

To call it only an inflow of money downplays the amounts involved. Equities received a veritable deluge of $77.4-billion (U.S.), blowing away the previous record high of $54-billion posted in February, 2000, just before the dot.com bubble began to collapse.

The huge January figure, compiled by TrimTabs Investment Research, had analysts at the firm nervous for obvious contrarian reasons. Smart investors, after all, should generally take the opposite approach to what the herd is doing. When the dumb money is buying, chasing stocks to five-year highs in the process, a smarter approach should be selling to take some profits.

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"As we survey the liquidity landscape, we increasingly do not like what we see. Investors are piling into stocks at a record pace, while companies are no longer supporting share prices," the firm said in a note to clients. "We do not believe most investors realize just how much money has poured into equities this month."

TrimTabs' conclusion: "Extremely high inflows into equities do not bode well for the medium-term performance of the stock market."

Looking at the historical data, the S&P 500 fell an average of 0.8 per cent following the previous nine largest monthly equity inflows, while stocks were down in the three months following six of those nine previous records.

With the Dow down triple digits so far today, and falling rapidly from the 14,000 level, TrimTabs might be onto something.

Why inflows are surging is a good question. TrimTabs believes U.S. tax policy offers only a partial explanation. Many people received bonus money in December to avoid January tax hikes, and put the money to work in the market last month. But the biggest reason "is simply that investors are becoming more upbeat."

TrimTabs says there are other contrary indicators flashing warning signs in the U.S. Short interest (or the number of shares sold short) on the New York Stock Exchange has dropped to its lowest level in nearly a year. Meanwhile, margin debt has climbed to the highest since February 2008, as exuberant investors borrow money from their brokers to try to goose their gains.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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