Time to Follow the Smart Money?

The dumb money always gets suckered into the market at the wrong time.

You don’t have to dig up your old history books to find the proof, either. Just look back a few months to December. Your average investor took his money and ran as far from stocks as possible because he was worried the fiscal cliff would tear the markets apart.

Now, after record inflows into the stock market earlier this year, it looks like individual investors are taking some money off the table. According to a research report from Bank of America Merrill Lynch, the firm’s private clients are signaling retreat…

“BofAML private clients–who have been the sole net buyers of US stocks this year– have begun to take profits as the S&P 500 continued its ascent,” the report reads. “This group has now sold stocks in three of the last six weeks, after near-record net buying earlier this year.”

That didn’t take long…

But as individual investors begin to back out of the market, the smart money has been more than happy to pick up their shares–and then some.

Hedge funds started buying at record rates last week, picking up large positions in the consumer discretionary and financial sector, as well as ETFs.

According to the BofA Merrill Lynch report, last week’s net buys of consumer discretionary and net sales of utilities were the largest on record. That’s some pretty bullish action. Utilities are considered a defensive sector, while consumer discretionary stocks are largely dependent on big spending from the general public…

Of course, there are no guarantees that the smart money is making the right move here. But it would be wise for you to keep some skin in the game if big players are going to continue piling into stocks.

Greg Guenthner
for The Daily Reckoning