If there is one thing that can be said about this market, it's that everyone is uncertain about the future. Volatility is quickly becoming the name of the game. Even the pros are starting to second guess this stock market. A recent survey of money managers reported that only 34.9% are feeling bullish. Five weeks ago, that number was closer to 54%. It's no wonder why retail investors have pulled an $8.8 billion out of stock based mutual funds over the past year and put nearly $410 billion into the bond market. However, these major outflows from stocks maybe the green light to begin to wade back into equities.

IN PICTURES: Top 10 Solutions For A Big Tax Bill


History As A Guide
Even though the current market has gained around 34.3% over the previous 12 months, investors only have about 50% of their portfolios currently in stocks according to retirement plan provider Hewitt Associates, down from around 70% in 2008. Merrill Lynch has made similar findings among the pros. Cash is still king. Hedge funds have reduced leverage and increased cash levels to 4.0% from 3.4%. And global asset managers have upped their holdings of greenbacks to some of the highest levels since June of 2009. (For a review of the global financial crisis, take a look at our Credit Crisis Tutorial)

When investors pull money out of the stock market in vast quantities it is often a contrarian signal to buy. After all, most investors are euphorically bullish at the markets highs and overwhelmingly bearish at the markets bottom. At the beginning of the credit crisis in 2008, investors sold stocks at a record pace. They pulled nearly $227 billion from the market that year, and the following year the S&P 500 (NYSE:SPY) rallied 26.5%. After the tech meltdown in 2002, $27.6 billion fled the markets. In 2003, it recovered 28.7%. Fewer bulls in the china shop could mean that a market rise is in the future.

Ways to Play It
Investors simply wanting to gain broad market exposure could just add to positions in the major indexes such as the DOW via the DIAMONDS (NYSE:DIA) or the S&P 500, however if investors are still worried about uncertainty but want the gains that history says are coming, there are alternatives.

Investors could bet on the mega caps. Overall, large international corporations tend to have stable revenue streams and much stronger balance sheets. Blue chips are better equipped to handle downturns than smaller companies. The iShares S&P 100 Index (NYSE:OEF) follows the largest stocks in the S&P 500 with top holdings in portfolio stalwarts Johnson & Johnson (NYSE:JNJ) and AT&T (NYSE:T).

Cash is fleeing European stocks just as fast as their U.S. sisters. With debt fears about Greece, Spain and Ireland, the euro region is still offering many good investing choices such as Germany (NYSE:EWG). Investors wanting take advantage of this could add the Vanguard European ETF (NYSE:VGK). The VGK is an inexpensive diversified choice, holding nearly 480 large-, mid- and small-cap stocks.

Finally, for those investors with higher risk tolerances, wanting to capitalize on the strength of smaller companies during recovery years, both the Vanguard Small Cap Value ETF (NYSE:VBR) and the iShares Russell Microcap Index (NYSE:IWC) are great ways to introduce smaller companies into a portfolio.

Bottom Line
With fear beginning to return to the market it is important to look at all the positives before making an investment decision. Historically, major outflows of capital from stocks signal very positive gains the following year. Currently, fright is once again making investment strategy. Now, maybe a good time for long term investors to pounce on stocks and the broad ETFs above are a great way to do that.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  2. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  3. Mutual Funds & ETFs

    ETF Analysis: Market Vectors EM High Yield Bd

    Learn more about the Market Vectors Emerging Markets High Yield Bond ETF, a fund dedicated to subinvestment grade foreign debt issues.
  4. Mutual Funds & ETFs

    ETF Analysis: First Trust Tactical High Yield

    Find out more about the First Trust Tactical High Yield fund, a debt security-focused ETF designed to produce high income.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI South Africa

    Learn more about the iShares MSCI South Africa fund, which is an NYSE-listed exchange-traded fund offered and managed by BlackRock.
  6. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P 600 Small Cap Growth

    Learn more about the SPDR S&P 600 Small Cap Growth ETF, a highly efficient fund that tracks small-cap equities in the United States.
  7. Mutual Funds & ETFs

    ETF Analysis: WisdomTree International Hdgd Div Gr

    Review an analysis of the WisdomTree International Hedged Dividend Growth Fund ETF, which offers investors broad international exposure.
  8. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraShort Yen

    Learn about the ProShares UltraShort Yen, an inverse-leveraged exchange-traded fund based on the value of Japanese yen in U.S. dollars.
  9. Mutual Funds & ETFs

    ETF Analysis: Market Vectors Semiconductor

    Discover how the Market Vectors Semiconductor ETF chooses its securities, and learn the types of investors for whom this fund is most appropriate.
  10. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. Lion economies

    A nickname given to Africa's growing economies.
  6. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!