Investing: Fund flows as stock market indicator
Looking for the market's direction? Don't use fund flows.(Photo: John Foxx, Getty Images)Story HighlightsStock funds now have $5.8 trillion in assets2008-2012 longest string of fund redemptions since 1970sHave you ever driven the wrong way on a highway because you thought you'd get there faster than everyone else? Do you put your shoes on before your socks? Have you put a $20 bill into a dollar-bill changer just to prove it wrong? If so, you're not a contrarian — a bold thinker who does things differently to get better results. You're a nimrod. Real contrarians know that you make money only by going against the crowd at key inflection points. They also know that some indicators really aren't very good for measuring key inflection points. Today's Bad Contrary Indicator: mutual fund flows. In theory, when people are pulling money from stock funds, it's a good idea to buy. After all, mutual funds are for small investors, and small investors usually buy high and sell low. Aside from the annoying snobbery of this notion — most individuals handle their affairs pretty intelligently — fund flows just aren't a good indication of popular sentiment. ASK MATT: Trying to time the stock market[1]INVESTING: Follow insiders on stock buys?[2]First, let's look at the indicator. Every week, the Investment Company Institute, the mutual fund trade organization, publishes estimated long-term mutual fund flows. In this particular series, "long-term" means "stock and bond funds, excluding money market funds." The ICI breaks the flows down into several categories. We're concentrating on total stock fund flows. The ICI's calculation shows how much money has gone in or out of stock funds in a particular week, taking into account moves up or down in the funds' share prices. Since March 2009, when the Standard & Poor's 500-stock index bottomed, investors have…
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