Reminder of our blog 2 wks ago – Absolute must read for anyone looking to exploit the “dumb money”

From 6 Aug (almost to the day of the top).

We moved to a bearish stance on this blog just over a week ago, having been in the market long enough to realise when it’s time “to leave the last bit to the next man”. 

The succesion of charts below showing the rotation into US equities by US retail investors and the rotation away by non-US domiciled and non-retail investors continues to pile up the weight of historical signals that act as a warning sign of a market top formation. To make matters worse for the bulls, the infamouse “Hindenburg Omen” has just reappeared too (more later).

The US retail investor has now, some 4 1/2 years into this bull run, shifted in a great-rotationary manner by the greatest amount since Feb 2000 – just as the last great bubble burst. US equities are the 3rd most over-crowded speculative long asset in the world after Crude Oil and the Brazilian Real. It seems the Fed is getting just what it wants but, just as Kyle Bass warned, “investors should be really careful doing what the central bankers want them to do.”

Ignore the charts below at your peril…

JPMorgan delves deeper into just who is buying…

Via JPMorgan,

What about retail investors? Retail investors have embraced the Great Rotation over the past two months.

This is shown above, which captures mostly US domiciled funds. The gap between equity fund minus bond fund buying skyrocketed over the past two months to almost $70bn as investors sold bond funds and bought equity funds. The June gap of $70bn for the difference between equity and bond fund buying is the highest ever, with the previous record seen in February 2000. The gap in July was marginally lower but still very strong by historical standards. It represents the biggest behavioral change by retail investors since the Lehman crisis, surpassing the previous bond/equity Rotation episode seen at the end of 2010/beginning of 2011.

Is there any difference in the behavior between retail investors in the US vs. their non-US counterparts?The most comprehensive worldwide data are only available on a quarterly and the latest available quarter is Q1. We proxy Q2 via monthly data instead.

Figure 9 depicts these worldwide fund flows, split between US and non-US domiciled investors. Similar to Figure 8, Figure 9 shows the gap between equity fund minus bond fund buying. While the two flow metrics had tracked each other pretty well up until the end of last year, there is a noticeable divergence over the past two quarters, which became even more striking in Q2. In all, consistent with our evidence from pension funds and insurance companies, Figure 9 suggests that the Great Rotation seen in the first half of the year has been mostly driven by US investors.

And it would appear that long US equities is among the most crowded positions in world assets...

Meanwhile, macro hedge fund managers have been neutralising their exposure to US equties…

Kyle Basses statememt “…the Fed’s policies are forcing mom-and-pop to “put their money in the wrong place at the wrong time. There will be consequences for that… there is only one way this will end… “and investors should be really careful doing what the central bankers want them to do.” may just come to haunt these Johny come late’s.

R Jennings, CFA. Fund Manager Titan Investment Partners

In our Macro Fund we are positioning ourselves to the short side in anticipation of an autumn rout and a revisit of the S&P 500 at least to the 1500/50 level. For more details or to participate, click the image below.