Tis The Season

The Barron's mutual fund "Cash Track" update suggests that seasonal money flows into the equity market once again peaked during the first quarter of 2007 and are beginning to roll over. This often happens as year-end bonuses are paid, early during the following year, and recipients roll this money into brokerage accounts for subsequent investment. This annual seasonality, while not fool proof, has been a reasonably reliable indicator of market sentiment and performance.

According to AMG Data Services, equity mutual fund money flows are down to $1.3 billion, versus weekly money flows of over $10 billion at the top of the market in February, when the market hit a new high. The market has subsequently recovered most of what it lost, but fewer and fewer buyers are pushing the tape up, and evidence that economic weakness may finally be impacting the payroll statistics isn't an encouraging development.

Flows into money market funds are up, which is pretty typical prior to tax day on April 15, while flows into taxable and tax-exempt bond funds have been relatively stable.

There is an old investing maxim, "sell in May and stay away" which reflects this seasonal activity in the market, with the current (bullish) season typically giving way to "the summer doldrums," which is a nice way of saying the market goes down as the summer progresses, and then every fall investors have to decide whether to get back into the market or not. Most of the time, it pays to be "in" the market.

This year, however, investors might want to see just how far the real estate defaults spread. If the bursting of the real estate bubble impacts the jobs market, investors might turn skittish. Similarly, is rising gold prices and dollar (currency) weakness causes foreign investors to turn tail and run, then rising interest rates will give the asset allocators a good excuse to sell stocks.

It may not be time to turn tail and run, but this continues to be a high risk market.

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.

Go to Investments main page.