Record equity inflows have contrarians worried

A troubling trend in equities builds steam.

(Photo: John Foxx/Getty Images)

(Photo: John Foxx/Getty Images)

In January, a record US$77.4 billion flowed into U.S-based equity funds, reports TrimTabs Investment Research. The inflow smashed the previous record of US$54 billion set in February, 2000.

For contrarian investors, heavy inflows are not a good sign, as they tend to coincide with market tops. In early 2000, four of the top-10 monthly inflows occurred, signalling a top in the long bull market of the 1990s. It will be important to watch equity-fund inflows over the next two to three months to see if a similar pattern emerges. If it does, we could be in for something a little more serious than a pause that refreshes.

Chances are that the January inflows into equity funds were augmented by one-time factors. Investors had been waiting for a resolution of the ‘fiscal cliff” issue, and once it was concluded favourably, money poured into the market. Other factors were investment of year-end bonus money and buying back of investments sold for tax losses in 2012. Hopefully, inflows for the next few months will settle back to more normal levels, easing the concerns of contrarian investors.