Exposing The 'Great Rotation' Exaggeration In 1 Chart

Includes: DIA, QQQ, SPY
by: Lou Basenese

Let this be yet another reminder to trust, but verify, every bit of information on Wall Street. For months, we've heard that a "Great Rotation" is underway. That is, investors are dumping bonds and promptly putting the money back to work in equities. And this uptick in buying activity is precisely why the stock market keeps hitting new all-time highs.

Sounds perfectly logical. And Wall Street appears to be corroborating the theory. "You have this huge migration moving from grossly overweight fixed income back into equities," says John Stoltzfus, Chief Market Strategist at Oppenheimer. The only problem? The data tells an entirely different story.

Here's the proof in a single chart - and, more importantly, why Wall Street's latest deception ironically bodes well for us…

Stocks Back En Vogue

I'll be the first to admit that a transition is afoot. In January, investors (finally) rediscovered stocks. U.S. stock funds reversed 20 consecutive months of outflows by attracting a record $18.4 billion.

And over the course of the first quarter, the enthusiasm for stocks intensified. According to the fund tracker, EPFR Global, investors plowed a total of $53.9 billion into stock funds in the first three months of the year.

Yet none of these purchases were fueled by the sale of bonds.

As you can see, U.S. bond funds actually attracted another $43 billion in fresh capital in the first quarter. Granted, that's down about $30 billion from the same period last year. But it's still a net inflow, which indicates that investors aren't rotating out of bonds one bit.

So where's the money coming from to buy stocks? Money market funds. Based on EPFR data, investors yanked a total of $103.9 billion out of these funds in the first quarter. The latest numbers from the Federal Reserve support the EPFR data, too. According to the Fed, the $644 billion influx into savings accounts and CDs we witnessed in 2012 slowed to a trickle this year.

As I'm sure someone will point out, I'm basing my conclusion on data for the first quarter of 2013, which ended about six weeks ago. And a lot can happen in that amount of time. Fair enough. But even if we look at the most recent data, it's clear that a rotation out of bonds still isn't underway.

Survey Says? Bonds Over Stocks

The latest weekly report from EPFR reveals that investors still prefer bonds to stocks. Case in point: For the week ending May 10, global bond inflows totaled $13.07 billion, versus $10.49 billion for stocks. And if we focus only on U.S. flows, bond funds and stock funds finished the week almost dead even at about $7 billion. So investors certainly aren't ditching bonds en masse in the United States, either.

Of course, those headline figures don't tell the whole story. As Cameron Brandt, EPFR Global's Director of Research, said, "A single ETF accounted for over $5 billion of the total net [equity] inflows and retail redemptions were the second highest year-to-date."

Bottom line: Forget all the chatter about the so-called "Great Rotation." Investors still love bonds more than stocks, which means this bull market has plenty more room to run. If you're reluctant to embrace such an optimistic view of reality, tune in tomorrow. Boy, do I have a statistic that'll zap any bearishness out of you!