By John Rubino
One of the traditional signs of market tops is individual investors finally succumbing to the lure of apparently easy money and pouring their savings into the stock market. In the past this dumb money flowed into equity mutual funds in general. But today it’s favoring exchange traded funds (ETFs) that, rather than trying to pick winners, simply offer exposure to sectors or broad market indexes.
Why is this a sign of a market top? Because small investors tend to trade on emotion rather than logic or expertise. It takes them a long time to forget the pain of the last bear market, so they avoid the early stages of recoveries. When they finally conclude that there’s money to be made, it’s usually too late.
As a reminder, in the recent past, these massive floods of retail panic-buying flows have stalled the rallies and not ended well. This massive inflow appears to confirm that the latest “Great Rotation” is one not from bonds into stocks, but from “smart money” to retail investors who have finally joined in the market euphoria, traditionally seen as a topping sign for rallies.