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Kass: Really!?! With Dougie

This column originally appeared on Real Money Pro at 8:28 a.m. EST on Feb. 20.

NEW YORK ( Real Money) -- All the market optimism surrounding rising retail fund flows into U.S. stock funds and heightened M&A activity brings us to a segment in my diary that I like to call Really!?! With Dougie (a takeoff on Really!?! With Seth & Amy, an old Weekend Update routine on "Saturday Night Live."

Really!?! Mr. Market?

So individual investors, after taking $400 billion out of domestic equity funds since 2007, have waited to buy into the U.S. stock market until January 2013 after the S&P 500 has more than doubled?

Really!?! Retail investors? Really!?!

And some of you bulls think stocks will rise because of a great rotation out of bonds and into stocks by the retail investor? Really!?! Bulls? Really!?!

As demonstrated in the chart above, the unassailable fact is that there is no documented correlation between retail investor inflows into domestic equities and the overall level of stock prices.


From 2007 to 2012 the S&P 500 saw a total of 40 individual months of price appreciation, 20 of these months experienced negative total equity fund flows. The correlation between monthly S&P returns and domestic equity fund flows is a meager 0.073.

In the 29 months of positive total equity fund flows during that same period, nine of those months had negative SPDR S&P 500 ETF Trust (SPY) returns -- that's 31% of the data points. In the aggregate since 2008 total equity fund flows have been down $400 billion while the SPY has appreciated nearly 75%.

Really!?! Bulls? Really!?!

And those of you who feel that heightened merger and acquisition activity likely presages the next bull market move because it is indicative of an expression of rising business confidence -- Really!?!

An increase in mergers, just like retail investors' inflows into domestic equity funds, is a lagging, not leading, indicator. A rise in M&A activity almost always follows a rising market and rarely leads a rising market.


The frequency of takeovers tells us nothing about the future direction of the market. It is but a talking point for the bulls.

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Chart of I:DJI
DOW 17,750.91 -140.25 -0.78%
S&P 500 2,063.37 -18.06 -0.87%
NASDAQ 4,763.2240 -54.37 -1.13%

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