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Fund Flows Not Doing What They're S'posed To


When are you guys finally gonna believe me?


According to AMG Data, investors pulled $433 million out of equity mutual funds for the week ended yesterday. I've shown before how extreme fund flows tend to be a good contrary indicator, and even though last week's outflow was not extreme, it was unusual in that it occurred during a week when the broader market rallied.

The correlation between fund flows (according to AMG) and market performance during that week is about .40, on a scale of -1 to +1. That positive correlation means that we tend to see positive fund flows during weeks when the market rises, and vice versa. I like to concentrate on those times when we aren't seeing what we're supposed to see, which would include this past week.

The table below shows the other times over the past three years where we've seen fund outflows of $100 million or greater during a week the S&P gained at least 15 points.

The following week, the S&P was higher 4 of the 5 times, with an average gain of 17 points.

Now contrast that to the table below, which shows those times when we saw the five highest fund inflows during a week when the S&P put in a negative performance.

After those instances, the S&P was positive only 1 out of 5 weeks, despite the steady uptrend during the study period.

With mutual fund cash levels low on an absolute and relative level, sustained outflows from equity mutual funds will hurt. But the key word in that sentence is sustained - a week or two of isolated outflows has proven to be a good contrary indicator more than anything. I think we're due for some type of consolidation here ('course, who doesn't think that?), but as long as we continue to see investors fight this uptrend, it bodes well for its continuation.

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