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JP Morgan market guru says he was wrong last year, but there’s signs to buy

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All 11 S&P 500 sectors finished in the red for the month of December while U.S. Treasury bonds, considered a safe haven for worried investors, saw buying balloon. The Dow and S&P 500 remain more than 15 percent off their all-time highs and both closed more than 2.4 percent lower Thursday.

Follow the money

Kolanovic said there was a buy signal in the flow of money into and out of stocks. The retail investor was selling stocks en masse to end the year, but the major pension funds were buying. Historically, it has paid off to follow the institutional money flows while fading the little guy, said the analyst.

“Retail flows are generally considered to be a contrarian market indicator. More often than not, retail investors tend to buy at times of exuberance and sell at times of panic,” Kolanovic wrote. Looking at historical data, “one can see that buying after large mutual fund outflows was historically profitable.”

Meanwhile, institutional fixed-weight portfolios, such as large pension funds, usually have a better track record of market timing, he added. In December, such funds bought at levels similar to those of 2002, 2008 and 2011, near the end of cyclical market bottoms.

“For unlevered investors, and those with less sensitivity to market-to-market volatility, pension fund buying is likely a positive market signal,” he added. “In summary, both mutual fund and pension flows suggest positive market performance in the future.”

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