Does Retail Buying Up Equity Funds Signal a Market Top?

When retail investors are finding themselves selling money market funds and injecting proceeds into equity funds, it could signify a market top.

In mid-Dec., investors sold $16.2 billion worth of money market funds. Equity funds enjoyed $2.2 billion in inflow while commodity funds attracted $461 million in new assets. Optimistic investors may look at the fund flows as a win-win scenario. Money market funds still pay a yield of around 5.0%. Investors have the best of both worlds with the choice of safety in cash or asset appreciation from stocks.

Investors may augment their returns in fixed income by buying Treasury bond ETFs. Those holding longer duration maturities will have the most upside provided interest rates fall. Already, the 10-year Treasury (IEF) and 20+ year (TLT) are both up ~9% and ~20% from their 52-week low (as of Dec. 20, 2023).

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Investors may hold a basket of stocks through the S&P 500 (SPY) or Vanguard’s ETF (VOO). The Vanguard S&P 500 Growth ETF (VOOG) suits aggressive investors. The value ETF (VOOV) is less volatile and pays a dividend that is nearly double that of VOOG.

The chance of a sharp correction on fears of a market top remains low. The market overcame regional bank failures in 2023. The escalation of the war did not hurt market sentiment, either.