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It's not a surprise, or even unusual, to see public investors with a quite different take on the market than so-called "smart money."

That divide has been quite obvious again in the current bull/bear market cycle. The bull market got underway in March 2009 when Wall Street institutions, the trading departments of major banks, insurance companies, pension plans and hedge funds began stepping back into the market, convinced the 2008-2009 financial meltdown had bottomed.

Meanwhile, the Investment Company Institute (ICI) says households are by far the largest group of investors in mutual funds. So if we use money flows into and out of mutual funds as a proxy for the activity of public investors, it was about that time, 2009, that public investors, distraught and devastated after holding on through the 2008 financial meltdown, finally began pulling money out of the market.

And that divergence between "smart money" pouring money back into the market while public investors pulled money out persisted as the bull market continued right up until last fall. At that time the Investment Company Institute reported money flows out of mutual funds had finally reversed to inflow.

The pace at which public investors had finally begun to pour money into mutual funds increased dramatically as we entered this year. It slowed only briefly when the market pulled back from its record high in May, but has quickly picked up its pace as the market has returned to its May peak again. ICI reported yesterday that global equity mutual funds experienced their biggest inflow last week, $19.7 billion, since June 2008.

Meanwhile, so-called smart money turned quite negative on the market in April and May, and seems to remain so.

The evidence is not only in mutual fund flows but in individual stocks.

According to BofA Merrill Lynch's weekly data of client trading patterns, institutional clients have been bailing out of stocks this year even as retail investors have been buying stocks at an increasing pace. The firm notes that retail buying was only interrupted when the market corrected in May, which was followed by a determined spurt of buying since. Just at BofA Merrill Lynch, retail clients have poured $7.4 billion into stocks so far this year while institutional clients have pulled $10.7 billion out.

Anecdotal evidence seems to present a similar picture.

In April, speaking in a round table discussion at the Milken Institute Global Conference, Leon Black, famed founder of Apollo Group, with $114 billion under management, bluntly said, "With stock markets having doubled since their 2009 lows, it's time to sell... we're selling everything that's not nailed down." Apollo executive Joshua Harris noted Apollo Group's opinion of "overvaluation in all traditional asset classes." Equally famed billionaire investor Wilbur Ross added, "Sometimes it is better to hide."

According to SNL Financial, billionaire investor George Soros of Quantum Fund fame reduced his holdings in financial sector stocks by an average of 80% in the first quarter of the year, holdings that three months previous included JPMorgan (JPM), Morgan Stanley (MS), Sun Trust, Capital One (COF) and AIG (AIG).

Meanwhile, global financial information firm Markit recently completed its semi-annual Global Business Outlook Survey. It covers 11,000 companies in 17 countries. Markit reported that the CEO's of these companies are the most negative since the days of the Great Recession in 2009 with the largest declines in confidence by executives in the U.S. and China.

Even the chairman of the Nasdaq stock exchange, Borje Ekholm, seems to be trying to warn investors. He said in an interview on CNBC on Thursday that, "What happens when you get too much cheap capital - which we've had for quite some time - is of course you get bubble valuations in financial markets. And that is clearly a risk." (The Nasdaq and Russell 2000, home of small stocks, have recently been the hottest areas for money inflows.)

The good news for investors may be that "smart money" tends to sell early while the market is still rising, while there are still bullish investors willing to take the other side of their sell orders.

The bad news is that smart money is regarded as being smart because of its history of buying low and selling high.

Something to think about anyway.

Source: The Divide Between Smart Money And Public Investors