Blog : Bull Has Legs

by Ed Zwirn on July 26th, 2013

The debate may continue over whether or not this bull market has legs, but risk appetite has returned in a big way, providing a big boost for penny stocks and other investment vehicles.

If you don't believe me, just check out what the "smart" money is doing: The evidence is piling up that fund managers are betting big on the U.S. economic recovery and even a resurgence for Europe's battered economy.

Fund manager commitments to U.S. equity funds last week (the week which ended July 24) hit a level not seen since Q3 2009, according to EPFR Global. In addition, another bellwether of risk appetite, U.S. high-yield bond funds, posted their second-biggest inflow on record, while flows into European equities were the biggest since mid-December.

All told, the fund flows into U.S. equities tracked by EPFR Global weighed in at about $8 billion over the week. Money market funds, the place where investors ususally stash scared money, saw $12 billion of redemptions, with over 90% of that occurring in U.S. funds.

The biggest beneficiaries of these bullish fund flows were the healthcare sector, which posted its  biggest monthly inflow ever, and financial funds. Healthcare and biotechnology sector funds are seeing inflows mirror the performance of the stocks in the sector, which has seen a year-to-date portfolio gain of 28%, beating the broader market,

And with the market for everything from penny stocks to  blue chip securities trading sideways this week, with the Dow Jones Industrial Average poised to post its first losing week in over a month, looking at fund flows is a good way of getting a handle on what the smart money is doing.

Despite the distractions posed this week by the current round of Q2 earnings reports, the kind of large institutional investors who make the fund flow reports are apparently betting big on a continued U.S. economic recovery and bull market.

Each penny stock is of course an individual story. Today's hot penny stock can become tomorrow's loser is bad news surfaces about it. That being said, the outcome of your penny stock investment can also be determined by what is going on in the market as a whole.

Any attempt to get a handle on the possible effects of the market on your penny stock means getting a handle on the so-called "smart money." As long as those who manage this money retain an optimistic outlook, placing bets that are truly too big to fail, the broader market will continue to boost penny stocks, distracting blips on the screen notwithstanding.