How Long Will Stock Market Exuberance Last?

NEW YORK ( ETF Expert) --According to EPFR Global, money has poured into stock funds at a faster pace than at any time since September 2007.

For those who may not immediately recognize the date as particularly significant, October 2007 kicked off one of the most volatile and bone-jarring bear markets in U.S. history.

By no means do I think January 2013 marks the beginning of another collapse of the financial system. In fact, there are clear advantages for risk-takers in 2013 versus September 2007. A 7% earnings yield for S&P 500 stocks today is presumably quite favorable when compared to sub-2% on 10-year treasuries. Corporate balance sheets have been fortified and home prices are slowly rising rather than rapidly declining.

Nevertheless, retail investors are notoriously late to stock parties. It follows that their equity fund commitment is worthy of monitoring, especially at a time when stocks sit near five-year peaks.

Fund flow is only one indicator to consider... and a contrarian one at that. There are also a number of ETFs that may be employed to identify investor behavior.

Here are three ETFs that I am tracking:

1. iShares 20+ Year Treasury Bond ( TLT). This long-term Treasury bond proxy has reflected strong demand for a "risk-off" asset. Also, for the better part of the last three years, fund flows into bond funds have been vibrant.

Right now, investors may be reevaluating whether or not Treasury Bond ETFs have anything left, either as a safe haven, income producer or capital appreciator. For instance, TLT has dropped further below its 200-day moving average than at any point since November 2010. The last time that happened, the S&P 500 gained roughly 13% in the 6 months that followed.

If TLT recovers its trendline soon, the potential for significant equity upside might be capped. If TLT continues to drift lower, it would likely be indicative of exuberance for "risk-on" investing to continue.

2. SPDR S&P Emerging Market Small Cap ( EWX). When investors have been afraid of stock assets during the last 5 years, they have jumped into Treasuries. When they've been enticed to take a modest amount of risk, they've chosen domestic large-caps that pay dividends.

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