Peter Switzer Daily

Beware dumb money!

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Wall Street headed up despite some negativity around yesterday with the local market linked to European recession concerns, but my worry is, are we seeing dumb money grab the headlines from smart money?

And this suggests that the old ‘sell in May and go away’ stock rule could work again this year. If it doesn't, it could signal the bear market that keeps rearing its ugly head will be over, though this could be wishful thinking.

Amateur vs. smart money

What the experts are seeing is that retail investors are slamming money into mutual funds, which then buy stocks, of course, but then there are signs that the smarties — institutional investors — are getting more cautious and looking to increase cash holdings.

That said, the outflows to cash are not all that big right now but it has to be said this dumb (or amateur money) in versus smart money out trend happened last year ahead of a stock sell-off in April. And those bad times for stocks lasted until October.

CNBC says corporate insiders are also heading out of shares. Jeff Cox pointed out that “they've dumped $4.2 billion in stock this month, about double January's level and — here's that warning sign again — the most since May 2011 as last year's rally fizzled, according to TrimTabs”.

The smarties could be giving us a clue but we can always hope they get it wrong this year and I suspect Europe will hold the key as the US economy is on a nice roll.

By the way, we might only see a five to six per cent pullback before another take-off happens. That’s what I’m hoping for but I have no hard evidence to say it will happen, though I like what’s happening in Europe now but can it be maintained?

Wall Street overnight

Overnight, the Dow was up 46.02 points, or 0.36 per cent, to 12,984.69 while the S&P 500 put on 5.8 points, or 0.43 per cent, to 1363.46. This was a good effort and was helped by good jobless claims numbers and a rise in house prices.

And for the record-keepers, 424 US companies in the S&P 500 companies have done their show-and-tell for earnings and 64 per cent beat the experts’ forecasts.

Here’s my best guess on the year ahead — a sell-off is likely but it won’t be serious and we will end up comfortably for the year. The smarties might get a shock while the dummies might be given a break!

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, February 24, 2012

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