CHART OF THE DAY: The Historic Surge Into Stock Mutual Funds That Has Everyone Talking About The 'Great Rotation'

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This week, among record fund flows into stocks around the world, long-only equity mutual funds recorded inflows of $8.9 billion – the biggest weekly inflow seen since March 2000, during the height of the tech bubble:

chart of the day, weekly flows to lo equity funds, january 2013

Not only did more money flow into long-only funds this week since 2000, but it was also the fourth-largest weekly inflow on record.

Many Wall Street strategists expect a “great rotation” out of bonds and into equities in 2013. This week’s flows are indicative of a strong thrust into stocks, but perhaps the most amazing part of the data is that bond funds also had strong inflows this week – meaning that the big rotation out of fixed income isn’t quite happening yet.

Citi strategist Tobias Levkovich, one of those who expects a “great rotation” out of bonds and into stocks on the horizon, wrote in a recent note to clients:

That equities have generated better returns for investors than bonds over the past four years seems to have been missed by many who have continued to allocate more money towards bond mutual funds. Furthermore, pension managers and endowments have tried liability driven investing and now are running into problems trying to achieve 6%-8% like return needs. Hence, a shift back towards stocks appears very probable, but some pension benefit consultants and actuaries may need to wait for five-year numbers in early 2014 to get over the hump.

What does it mean shorter-term? BofA Merrill Lynch strategist Michael Hartnett suggests that this a sign that the recent exuberance in the stock market is getting a bit overdone, and suggests that it could strengthen the case for a correction:

Neither massive inflow nor bullish sentiment guarantees big correction in equities – still need a catalyst; but vulnerability to negative catalyst rising sharply

5% January dip in January would be healthy; without one risk of much larger correction later in the quarter grows.

Other signs investor sentiment now bullish: big large specs positions in NKY, SPY, IWM and Oil; 41/45 markets now trading above 200 & 50dma – most bullish reading since Nov’10.

READ MORE: The Two Things That Could Kill The Current Market Rally >

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