Coming Week: Hazier Horizon

Actions vs. Words

With the Dow hovering around its all-time high, you'd think investors would be ebullient. The latest survey by the American Association of Individual Investors shows bullish sentiment rose to 46.3% from 39.5%, while bearish sentiment dropped from 33.3% to 30.5%.

But actions speak louder than words, and fund flow data show that retail investors are still skeptical about the U.S. stock market. Including exchange-traded funds, domestic stock funds suffered net outflows of $4.1 billion for the week ended Jan. 31, while foreign-based equity funds and ETFs had net inflows of $2.6 billion, according to AMG Data.

The January results are consistent with the pattern set in 2006, when domestic equity funds and ETFs combined had net inflows of $15 billion (U.S. mutual funds actually suffered outflows of $5.8 billion last year), a paltry sum compared with the nearly $143 billion of inflows into foreign equity funds and ETFs.

In other words, U.S. equities are a long way from being in "bubble" territory, while the so-called dumb money remains very much enamored with international equities.

Finally, last Monday saw the announcement of several relatively small deals and speculation of a few large ones, including Bristol-Myers Squibb (BMY Quote) being acquired by Sanofi-Aventis (SNY Quote) and Countrywide Financial (CFC Quote) being in the crosshairs of Bank of America (BAC Quote). By week's end, the former gained some credence amid reports Bristol-Myers has hired investment bankers, but Bank of America squashed speculation about the latter.

Meanwhile, the $40 billion-plus battle over Equity Office Properties (EOP Quote) is likely to come to an end soon, as the commercial property giant has expressed a preference for Blackstone Group's bid. Shareholders are expected to vote on the deal Wednesday.

Elsewhere, Nabors Industries (NBR Quote) was up 4.5% Friday on speculation that it too is a potential private equity takeover target.

After such speculation, confirmation of any of the above is unlikely to inspire much trading next week. It's the as-yet unknown events that are likely to have the greatest impact.

Take, for example, Friday's sharp decline in copper and zinc prices, reportedly stemming from concern about losses at a London-based hedge fund, Red Kite. Notably, the spring 2006 selloff began amid dislocations in the commodities markets exacerbated by losses at a hedge fund, Ospraie Management. Commodities weakness then spread into emerging market stocks and eventually developed markets as well.

That's not to say a repeat is necessarily in the offing. But it's usually the things people aren't worried about that creep up to bite investors, who apparently aren't much worried about international markets these days, judging from the fund flows cited above.

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting