Wondering where this January running off the Bulls will lead? Well, consider parallels some wonks at the Leuthold Group are making between this year's Bull run and the market cycle of the late '70s.

Doug Ramsey, Leuthold chief investment officer, and research analyst Kristen Hendrickson provide an in-depth analysis and comparison of January 2013's flows to other time periods in the February edition of Leuthold's Green Book.

Ramsey has this to say on the subject:

January’s public stampede into stock funds has its own late-1970s parallel. Fund flows follow market action, they don’t cause it. While the thought of hundreds of billions switching from bonds to stocks in a “Great Rotation” makes for great sell-side storytelling, history doesn’t support the public’s ability to pull it off (at least with any profit to show for it). On the other hand, contrarians shouldn’t sell because of this data point alone. Overall, we’d grade the public’s return a mild contrary negative.

Meanwhile, Hendrickson makes these points regarding January's flows:

This certainly does not lend itself to “The Great Rotation” phenomenon some are spouting about as domestic equity funds capture flows. Contrarily, it appears to be more of the same instead of a change in direction. Last year bond funds averaged net inflows of about $25 billion per month.

Other points made by the both of them from the report are as follows:

After a 50% decline into the September 1974 low, the S&P 500 advanced +121% to a November 1980 cyclical high. The upswing was interrupted by a 19.4% de- cline (1977-78) that was followed by even larger net fund outflows than in the first two years of the bull market. But investors finally capitulated, putting $500MM (then a large amount) into equity funds during the month of the bull market top.

After a 57% decline into the March 2009 low, the S&P 500 advanced +121% to a new high in February 2013. This upswing was interrupted by a 19.4% decline (mid- 2011) that was followed by even larger net fund outflows than in the first two years of the bull market. By January 2013, investors grew tired of watching all the fun and put $22 billion (est.) into U.S. focused equity mutual funds—the first month of net in- flow since April 2011 (not coincidentally, the month of the top preceding the 19.4% decline).

Overall, their conclusion is this:

Fund flows follow mar- ket action, they don’t cause it. While the thought of hundreds of billions switching from bonds to stocks in a “Great Rotation” makes for great sell-side storytelling, histo- ry doesn’t support the public’s ability to pull it off (at least with any profit to show for it). On the other hand, contrarians shouldn’t sell because of this data point alone. Overall, we’d grade the public’s return a mild contrary negative.

For more of the analysis, request a copy of the Green Book from Leuthold. 

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