The market was on the cusp of a major move higher after seesawing back and forth before tripping over news out of Europe where the game of chicken between Greece and lenders moved closer to the edge of a cliff. The European Central Bank (ECB) will not accept Greek bonds as collateral and this means someone has to blink soon.
Greece is backing on the notion that they owe so much money that no one, including those stingy Germans, would let them leave the Euro and possibly go into a series of defaults, or print up fresh Drachma to pay off debts. It is a dangerous game, and in many respects, it is a lousy game. The Greeks had a great run, spending money they did not have for a few decades and now, the moment of reckoning has arrived.
There is no doubt in my mind that they will cut some kind of deal. Although interest payments on money owed to the European Emergency Stability Fund is around 1.5%, as if the debt were AAA rated. I cannot believe we are still dealing with these shenanigans, but we are….or at least Europe is, but as you can see from that quick loss of 100 Dow points, investors are as well.
The Role of Individual Investors
The role of individual investors that respect the stock market and its influence is often overstated. Ever since that legendary moment Joe Kennedy sold everything before the crash because of a shoeshine boy waxing enthusiastically about the market, it's been said that the individual always gets it wrong.
With that in mind, the pros like to monitor how excited individuals are when it comes to stocks as a warning system of sorts. I think that is a huge mistake for several reasons. One- investor enthusiasm mostly mirrors the pros. Two- investors actually have a good sense of timing; if anything, I think their bearishness is more of a buy signal than their bullishness being a sell signal, and three- there are not enough individuals in the market to sway anything.
However, with the best two-day start to a month in years, it looks like individuals got bullish at the right time last week.
Investors have simply missed this rally in heartbreaking fashion, dumping equities throughout the rally while focusing on bonds or sitting on cash.
Last year, investors returned to US equity funds through passive investing while dumping actively managed funds.
Active = expert manages fund for a fee up to 1% saw outflows of $98 billion last year, while
Passive= investor buys basket (stocks & industries), or index fees under 0.2% saw inflows of $166 billion
| 2014 US Equity Fund Flows | |
| Passive | Active |
| -$98 Billion | +$166 Billion |
Moreover, I actually believe investors will pour into the market once the Dow gets through and lifts away from 18,000. There is no doubt many will stay away until there is change in the White House, whereas others want to see responsible fiscal measures so we don‘t become Greece in the future.
The problem with that is that it might be too late.
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