Stocks: Are small investors too late to the party?

By Brett Arends, The Wall Street Journal — 10/29/10

Private investors are getting back into the stock market—two months into the rally.

The latest numbers show investors put $759 million into U.S. equity funds in the week ended Oct. 26. Admittedly, that number is modest. But this the first time Main Street Americans been net buyers of U.S. equity funds in six months. They were cashing out all through the summer downturn.

Portfolio managers tell a similar story. The phones have started ringing in the past 10 days. Now that the Dow Jones Industrial Average has jumped 13%. Gold has risen 7%. Silver has risen a stellar 23%. Some other commodities have also boomed. And the dollar has fallen more than 5%.

Does this make it dangerous for investors coming late to the party? Ned Davis at Ned Davis Research thinks it might be. "There has been a lot of chatter and 'hopes' related to the November 2nd midterm elections..." he wrote to clients. "When one adds in all the 'better-than-expected earnings news,' one can make the case that a lot of good news is probably already baked into stock prices. Therefore, I would be wary about buying at these levels."

Mr. Davis adds that investors have now turned ominously optimistic. That is usually a bad sign.

John Hussman of the Hussman Funds—admittedly a very cautious investor—calls the current market "overvalued, overbought [and] overbullish."

When it comes to anticipating good news, Wall Street has an old saying: Buy on the rumor, sell on the news. In other words, by the time the happy event finally occurs, the market has often overanticipated the benefits.

Momentum may yet carry the stock market higher next week and even further. Short-term movements are notoriously difficult to predict. The most recent indicator is still bullish. Perhaps there are more good times ahead. But investors should make sure they're not just getting stampeded by the crowd.