Thursday, April 11, 2013

The Great Rotation becomes the Great Panic

One of the themes for this year so far has been the so-called “Great Rotation” out of bonds and into stocks.  While this has been true for the most part, there are signs that investors haven’t completely lost their skittishness and haven’t yet fully embraced the bull market.  This can be seen in the recent performance of the Treasury Bond ETF (TLT). 

Note the conspicuous spike in the TLT price line from last week.  This is indicative of the rush into Treasuries that occurred with North Korea’s threatened nuclear strike.  Gold also experienced a rally last week during the tension.  What this tells us is that investors are still quick to run to the safe havens over the slightest provocation – however distant the threat may be.  But it’s equally telling that while investors may have temporarily panicked into Treasuries, they didn’t completely run away from stocks.  

Now that the threat of a military episode involving North Korea is perceived as unlikely, investors were just as quick to rush headlong into equities, sending the major indices to new highs.  This volatile behavior is reflective of the latest AAII investor sentiment poll which showed a huge spike in the number of bears and a substantial drop in the bulls.

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