Monitoring where asset allocation funds are putting their money gives an indication of whether fund managers are being more conservative or aggressive this week. Our smart money indicator is derived from a comprehensive analysis of top asset allocation Gurus' recent asset exposure. Currently, it tracks the aggregate asset exposure on US equities and bonds.
We track two separate indicators:
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As interest rates have moved higher, devaluing fixed-income securities, there is a sign of an asset allocation shift – falling bond values have caused investors to build up an overweight in equities. Benchmark 10-year notes' yield has jumped in part on growing optimism about the economy and on signs that growth could accelerate in 2011.
Although we have seen a rotation out of fixed income into stocks consistently over the four weeks, it still remains unclear whether this trend will continue – after all, there will be a level where the higher yields start to threaten the positive momentum in the stock market.
A more pessimistic but objective view offered by John Hussman paints an alarming picture on the current markets: he characterizes the current state of the markets as "overvalued, overbought, overbullish, rising-yields" and the usual large losses followed.
Looking ahead to 2011, with recent clarity on future taxes and more signs that the economy is on solid footing with improving economic data and stronger corporate earnings, equities can be propelled even further, driving more inflow into the equity market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.