Stocks: Should You Join the Great Rotation?


Stocks were roughly unchanged today, with the Dow (INDEX: ^DJI) and 0.13% and the broader S&P 500 Index losing less than one basis point (one basis point is equal to a hundredth of a percentage point). Extraordinarily, the VIX Index (INDEX: ^VIX) continues to melt down, registering its lowest closing value since June 2007 (the VIX is a measure of investors' expectations for 30-day volatility in the S&P 500).

Follow-up: Wells Fargo
In this morning's column, we remarked that the pre-opening earnings report from Wells Fargo's (NYS: WFC) was poorly received by investors; however, by the close of the day, the stock was down just 0.85%. That performance put it in the middle of the pack in regard to its four closest peers (B of A, Citi, JPMorgan, and US Bancorp) and in line with the KBW Bank Index (+0.78%).

Has the great rotation begun?
According to report released by Bank of America Merrill Lynch this week, U.S. equity funds have taken in net inflows of $19 billion for the first full week of the year, which represents the highest amount since June 2008 and the seventh consecutive week of positive flows into equity funds. The market is now abuzz with the question: Has the great rotation begun out of bonds and into equities?

While the funds flow data is a positive indicator for sentiment, weekly data is pretty volatile and heavily influenced by the market's short-term performance. Recall that stocks got off to a roaring start this year, gaining 2.8% over the first three trading days last week. Furthermore, while bonds are clearly unappealing due to the microscopic yields on offer, equities aren't a screaming buy at current valuations.

Combine those observations with the suspicion that investors have become somewhat complacent -- see the above remark on the VIX index -- and it wouldn't take much to for equity inflows to turn into outflows. In my opinion, a 5% to 7% correction would certainly do the trick. Note that this is not a prediction, just a possible scenario. Investors should consider their exposure to stocks in relation to their long-term goals and remain opportunistic to take advantage of undervalued securities.

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Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him @longrunreturns. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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