Canaccord Genuity U.S. Portfolio Strategist Tony Dwyer takes a closer look at U.S. fund flows in his most recent update. He notes that the bearish flow of funds argument had been that there isn’t any new money flowing into the market, so the rally is not sustainable. Now the argument is that too much money is flowing into U.S. equity funds, which the bears believe is a good contrarian signal pointing to too much enthusiasm. And this happened in just a week.
Dwyer said that while a small correction (2-4%) can happen very quickly given recent upside, he continues to believe we remain in the early innings in a rotation into equities that should finally begin to expand the market multiple as systemic failure and recession fear continue to subside. While there was a historic move into equity mutual funds last week, it is important to note that it was in the context of a still very negative six-month sum of weekly equity flows (excluding ETFs).
He notes another pronounced change was following the 2000-2002 bear market and subsequent negative six-month sum. Dwyer is very hard pressed to believe this is going to be a one-week phenomenon that signals a sustainable market drop ahead. While there could be a brief period of consolidation associated with a near-term overbought condition, his 2013 S&P 500 target remains 1,650. History, global monetary policy, and the fundamental sweet spot of U.S. economic data argue strongly for better performance as we move through 2013.
Dwyer remains optimistic due to further evidence of sustainable improvement in: 1) Consumer Sentiment, 2) Employment, 3) Credit availability, and 4) Housing. His “Overweight” sectors remain Information Technology, Financials, Industrials and, to a lesser degree, Consumer Discretionary.