The attraction of contrarian investing is that by its very nature, it goes against the crowd. It is the opposite of momentum investing, which not surprisingly, is how most people invest. The only thing momentum investors know about most of the companies they wish to own is that their stock’s price has ascended recently, and based on their suppositions, will continue to do so into the foreseeable future.
With the market continuing to push higher in recent years, it would be reasonable to assume that momentum was driving the market to new highs. In fact, just the opposite was happening. Throughout this bull market run, investors were actually withdrawing funds from equities and investing instead in bonds.
Investor skepticism is a contrarian trait that actually gives support to the market as it implies that investors are waiting for lower prices in the future. With more buying power on the sidelines, the market can rise further. Bull markets typically end when everyone who was going to invest is fully invested, in other words, there are fewer uninvested dollars to push prices higher.
It appears that skeptical investors have finally thrown in the towel with fund flows now favoring stocks much more than bonds. If this trend persists, it should be viewed with caution as it signals that investors believe that prices are unlikely to drop in the near term and are going all-in on stocks.
As we mentioned earlier, we have not seen this scenario during this bull run and if it persists, may indicate a final capitulation by bears. Although there is a lot of money sloshing around in the economy, recent changes in fund flows may indicate that this bull market could be maturing.
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