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Tuesday, July 31, 2012

Fund flows

I thought these charts from Schaeffer's research of mutual fund flows were pretty interesting. The first one is SPX versus equity mutual fund flows.

This chart shows steady inflows in the 80s and 90s with the exception of the crash of 87.  That is classic secular bull market behavior.  People generally feel good and continue to put money into stocks.  The classic euphoric top in 2000 really stands out.  Fund flows went negative during the 2000-02 bear market, but they turned positive again when the market turned back up in 2003.  The flows slowed to a trickle as we retested the 2000 high in 2007.  They even went negative a little before the crash.  Unlike the rally that started in 2003, the flows have stayed negative on this run up.  That is very similar to what happened in the 70s.  People continued to pull money out for many years.  This is classic secular bear market behavior.  I have heard and read a  number of people proclaiming these outflows are bullish for the market.  Here is what Shaeffer's research said about this chart.

It's worth touching on mutual fund flows, as well. Looking at domestic equity mutual funds, we've got record outflows over the past 12 months of around $175 billion. What's really amazing to me is that, historically, the 12-month flows tends to move with the overall market. Yet, what has happened since the lows last summer is an increase in outflows, along with a steadily higher stock market. From a contrarian point of view, this could be extremely powerful, as it shows how much more potential there is for higher prices should any flows make their way back to equities.

If things get better the money should come piling in and drive the market up.  That is certainly true, but when exactly are things going to get better?  People were smart enough to put money in consistently when the market was going up.  Is it possible they are smart enough to be taking money out now?  What I would expect at the final bottom of a secular bear market is something like what happened in 2007 in reverse.  As the market approaches the low, the fund outflows will dry up and fund inflows will start to happen.  It may be quite some time before that happens though.  I just don't see how we get real sustained upward progress in the market until the fund flows turn positive and stay that way.

Here is a fund flow chart for bonds.

Plenty of money still going in at extremely low rates.  I keep hearing a lot of people dying to short bonds. I have heard it called the short of the lifetime.  A lot of people kept calling for major tops in stocks in the 80s and 90s, only to be wrong.  The fund flows made sure of that.  This is exactly the same for bonds.  Now everybody is trying to call the top.  I am pretty sure the top is not going to happen until the fund flows dry up. There is no sign of that in this chart yet.  The most likely time for that to happen is right after everybody gives up calling a top in bonds, LOL.


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