Retail investors took 16.6 billion dollars out of US equity mutual fund flows in the first three weeks of June. As a matter of fact, they took over 17 billion dollars out of all equity mutual funds. You should remember that, we've had one of the largest put buying streaks in over 5 years in the month of June. I have been covering this in previous posts over the last few weeks.
Therefore, is it a surprise to anyone that the S&P 500 is now powering towards 1,310 in just a few days? Is it a surprise to anyone that Nasdaq 100 and Russell 2000 have already retraced 50% of their drop since the 02nd of May top?
Obviously, as soon as the stocks have started to rally, perma-bears have come out saying that the current rally is just based on temporary short covering. I say disbelief, is the perfect fuel for more gains. Bespoke Investment Group also disagrees with the short covering "excuse" and actually did some research on this subject. They wrote an excellent article on their website about this topic - read it here.
Finally, for those who have missed it before, my article on Japanese stocks would have come in handy with this topic as well. I showed how retail investors remained heavily short equities on the Nikkei. As a matter of fact, bearish readings were higher than in March 2009, bull market lows. Within the next 48 hours, Nikkei put in a bottom and took off like a rocket! Now, I'm not sure about you, but to me when a price retraces almost all of the previous two month losses within 9 days, it is a very bullish sign. This is a powerful reversal indeed.
Also for those contrarians out there, do not forget that the reason Japanese equities are outperforming the world at the current time is because majority are underweight this region as of early June 2011. And just like always, I bet fund managers are now chasing the price as well as the momentum.