If you’re bullish…

Despite all indication that a top was forming, the market has been amazingly resilient.  I believe the bears are running out of time to push the market lower and that the bulls could take control and instead drive the NASDAQ to new highs. 

Negative sentiment has continued to build as the market has essentially traded sideways.  While sentiment is far from the negative extreme that makes me comfortable being bullish, the sentiment indicators have come off the extreme bullish readings that made me very uncomfortable earlier this year. 

The market has acknowledged several DeMark Sequential (TM) Sell signals but has done so only briefly.  That is usually a sign of underlying strength. 

In addition, breadth indicators on the NASDAQ have once again turned positive.  Most importantly, the Summation Index, Bullish Percent and the Percent of Stocks over the 50 day moving average have returned to "buy" signals.

I believe the increased volatility and resilient market are caused by stocks moving from "strong hands" into "weaker hands".  That is, cash is flowing into the stock market from individuals who were speculating in the slowing real estate market. 

Gary Halbert has noticed the same trends.  He gave several potential reasons for the strong fund flows by individual investors in his Forecasts and Trends newsletter.

All of a sudden, investors are pouring near-record amounts of money into the stock markets. As I will discuss below, individual investors are moving into the stock markets at a stronger pace than seen in years. Money flowing into stock mutual funds rose to a near record amount last month. Likewise, the number of stock trades at discount brokers rose substantially in January.

An article in the Wall Street Journal last week noted that, "Individual investors are moving into the market at a stronger clip than seen in years." And in fact, there was a strong surge of new investor money going into stocks and mutual funds in January. We have seen a similar trend at my company. Calls from prospective investors are up, and even our existing clients are adding to their accounts and opening new ones.

At Fidelity Investments, the nation’s largest mutual fund family, net flows of money going into stock mutual funds soared to $5.6 billion in January, up from only $400 million a year ago. Fidelity said the large inflow represented new money coming in and the redeployment of money that was sitting in cash in brokerage accounts and money market funds.

Charles Schwab Corporation, for example, saw $4.5 billion flow into its stock mutual funds last month, the highest amount since February 2000, when net investments hit $4.7 billion. February 2000 was, by the way, the top of the long bull market.

At Citi-Group, the Smith Barney Consulting Group division, which provides fee-based managed accounts, says investment flows into stocks so far this year are "substantially" higher than they were in 2005 and 2004. St. Louis-based brokerage firm Edward Jones saw new account openings in January rise 11% from a year ago, and says February growth is also strong.

The number of trades by individual investors at discount brokerage firms has risen substantially in recent months and jumped an estimated 30% to 40% in January from December. The discount firms, which offer lower-priced trades, also report that money flowing into stock mutual funds last month was at a near record level.

Equity fund inflows in January alone were a whopping $29 billion, according to AMG Data Services (Arcata, CA), compared to $38 billion for the entire 4Q. I could go on with such numbers, but it is clear that investors are flocking into the equity markets this year.

Interestingly, new assets going into money market funds were up only $4.1 billion in January, compared with average January inflows of over $33 billion over the last 10 years, according to iMoneyNet.com. This suggests that much of the money moving into stocks today is coming from the sidelines.

There are numerous reasons why investors are flocking back into the equity markets. Clearly, the fact that the equity markets have been rising since last fall has piqued the interest of more and more investors. Many investors have been waiting to see if the Dow could get over 11,000 and stay there, which it has. They may be viewing this as a buying signal.

Next, where else can investors go? Rising interest rates are having a negative effect on both the bond markets and real estate, where a huge amount of money has been invested. With the Fed expected to raise interest rates at least two more times, investors may be deciding that it’s time to leave the bond market. Ditto for real estate.

Next, aging Baby Boomers may finally be realizing that they have to save more for retirement. Having been on the sidelines for several years following the bear market of 2000-2002, and seeing the market move to new highs recently, maybe now they’ve decided to jump back in. Many of the Boomers who have been on the sidelines since the bear market might be seeing that they have to be in the market to ever hope to reach their retirement goals.

Or, Boomers may now be realizing that they’ve left a LOT of money on the table since bailing out in late 2002 and early 2003 when the S&P 500 bottomed out around 800. Today, the S&P 500 is near 1300. That’s a cumulative return of over 60%. Greed is finally overtaking fear, apparently.

While the money flowing into stocks is a bullish development in the near term, it’s a caution sign for the longer term.  As Warren Buffett has noted in the past "be fearful when others are greedy, and greedy when others are fearful."  Great advice from the richest man in the world.