Friday, February 29, 2008

Do Mutual Fund outflows spell the market bottom?

Many times ordinary investors are the last to jump on the bandwagon… this is why Wall Street refers to them as “the herd”. Usually these investors are the last to the door after all the professionals and active investors have already established positions.

Mutual Funds are a good representative vehicle of this unsophisticated investor population. The outflows from U.S. equity Mutual Funds in January appear to demonstrate that these investors panicked and headed for the exit door. Over $432.9 billlion was pulled out of equity funds in January, the worst month of outflows since July 2002. In 2002, this month basically marked the bottom of the market with the S&P at 797.70 on July 23, 2002. These lows were re-tested in October of 2002, before the market took off in 2003.

This leads to the question if this behavior once again acts as a signal of a market bottom… or if this is just the start of a severe redemption cycle leading to “cardiac arrest” for the stock market.
Mutual funds markets face long-term outflows