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Public Participation - First Fear... then Concern... then Fear... Lastly Capitulation...

As you can see from the number “13”, we have published 12 past comments on public participation. Obviously, we are close to being obsessed with the statistics on how enthusiastic the public gets when they think it is time to buy equities and also how fearful they become when they think it is time to liquidate equities. This excessively enthusiastic and fearful emotion by the public when they act “en masse” is not confined to equities. Examples of this could be seen in the gold market as well as oil and gas “tax shelters” in the early 1980s.
The easiest method to participate in the equity market is to buy equity mutual funds and that is the reason we concentrate our efforts on tracking the public participation in them. Since the October mutual fund inflows were just released at $25.5 billion, we have updated and attached our excel spreadsheet quantifying the exuberance and fear.

Since the peak of the stock market near the end of the first quarter of 2000 the public has invested about $287 billion into the equity mutual funds. This number is derived from adding the years 2000 (+$309 billion), 2001 (+32 billion), 2002 (-$26 billion), and 2003 year to date net additions of $112 billion. If you subtract the 2000 first quarter inflows of $140 billion, which was the largest quarterly inflow in the history of any country (and also coincided with the market peak) you would come up with the inflows of $287 billion since the bear market started.

We have discussed in many comments the process of a typical bear market. It is usually comprised of three stages. The first is denial, the second is concern, and the third is fear and capitulation. We have finished the first two stages, but we have yet to enter the third and final stage. It will be easy to detect when we enter the third stage. It will be accompanied by major liquidation by the public of equity mutual funds and will look similar to the liquidation that took place after the last major bear market in the early 1970s where liquidation took place over the next decade (see NDR chart). We got started with the fear and capitulation stage last year when we had liquidations of about $98 billion from June through October, but since the market rally started, the inflows started right along with it.

We don’t believe the stock market is on its way to starting a new bull trend with this relatively minor public capitulation after the greatest financial mania of all time.

By: Marty Weiner