The Big Picture

« Asset Class Returns | Main | Look who's blogging: Alan Greenspan »

Foreigners and US stocks: the ultimate contrarian signal?

Monday, September 03, 2007 | 12:00 PM

in Investing | Markets | Psychology/Sentiment

Michael Panzner recent commentary is very relevant to our earlier discussion today:

"Many commentators note the fact that U.S. investors have poured a lot of money into foreign share markets in recent few years.

As it happens, the flow has not been just one way.

In fact, based on cumulative 12-month totals derived from monthly Treasury Department data, foreigners invested a record amount in U.S. corporate stocks during the period that ended in July, the latest month available.

When was the last record set? In January 2001, just as the dot-com bubble was bursting and the bottom was falling out of the U.S. stock market.

Indeed, over the past decade, foreigner investor behavior has proved to be a reasonably good long-term timing signal -- in contrarian terms, that is.

For instance, while U.S. share prices were bottoming in 2002, foreigners continued to reduce their exposure, until they eventually rejoined the bullish party in late 2005.

A cynic might wonder: now that they are all in, can much lower prices be far behind?"