Stock Market High

Enthusiasm for exposure to the U.S.’s apparent economic recovery is far from fading. A record $39 billion flowed into U.S. stock funds last week, while non-U.S. funds suffered $2.5 billion in outflows.

So it’s safe to say that retail investors are now officially in love with, and fully committed to, U.S. stocks.

And that’s both good and bad.

Naturally, increased participation will create a tailwind for stocks in the near-term. Increased buying pressure will add fuel to the market’s rally, particularly as it’s coming at a time of seasonal strength.

But on a longer time scale, the massive upswell in retail participation is a warnrning sign.

Retail investors are notoriously late to the game. They tend to pile into late-stage bull markets at precisely the wrong time. So, after for years resisting investment in what’s been called the “most-hated bull market,” herd-following investors have caved to the lure of easy bull-run riches.

And that means the bull-run is closer to ending than these investors suspect.

But that doesn’t mean it will end suddenly this week or next.

Let’s take a closer look at these trends as we go around the market in 10 seconds…

• Global stock markets widely climbed, led by notoriously “risk-on” markets — Chinese stocks jumped 2.8%, emerging-market stocks rose 2.2% and small-cap stocks climbed 1.6%.

As I predicted several weeks back, Consumer Discretionary (XLY) stocks have outperformed during the holiday shopping season, beating the broad market’s returnrn by nearly fourfold over the last month.

• Bond markets mostly slid last week, with the exception of junk bonds which, as a risk-on play, tend to trade alongside stocks. Higher interest rates and a surge in junk-bond prices suggest investors are optimistic about the future. This confirms the sentiment revealed by record equity inflows and the outperformance of risk-on sectors.

• Commodity markets were broadly weak. Natural gas prices slid sharply, losing more than 17%. While the energy sector (XLE) closed strongly higher last week, oil prices (USO) continued to edge down. So while the energy complex is trying to find a bottom, there’s no clear indication that the selling is over.

As I did last week, I’m still recommending holding off on any bullish energy investments for now.