The past 12 months saw record inflows into U.S. equities from foreign investors. It’s also interesting to note that foreign investment was consistently low until the mid-1990s when globalization really picked up steam.
Looking at nominal numbers doesn’t really make sense since fiat currencies are constantly being inflated. To make this indicator more range-bound, we can look at foreign investment in terms of inflation-adjusted dollars:
The chart above demonstrates that foreigners have rushed into U.S. stocks at the fastest pace ever (in real dollars), exceeding prior peaks in early-2001 and 2007.
I would consider this to be a long term warning sign.
The U.S. and global economy is improving. The Conference Board Leading Economic Index has gone up for 9 straight months.
When this happened in the past, this was bullish sign for the S&P 500 over the next 6-9 months.
S&P 500’s negative streak
The S&P 500 fell for the 5th consecutive day for the first time in almost a year. Since after 1959, this was quite a bullish sign for stocks on all time frames.
Conclusion: market outlook
Here’s how I think about markets based on 3 different strategies & time frames.
- Long term investors should be highly defensive right now. Look for opportunities away from public equities where there is less long term risk.
- Medium term contrarian traders should go neither long nor short. Wait. Risk:reward doesn’t favor long positions right now, while shorting into a speculative rally can end in disaster.
- Short term trend-focused portfolios should continue to ride the bull trend because no one knows exactly when it will end.
My discretionary market outlook does not reflect how I trade the markets right now. I trade based on my trading algorithm that cuts through the noise of endless research, indicators and charts.