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This "funds flow" indicator tells us
how much money is flowing IN or OUT of long-term, domestic equity (stock) mutual
funds. When money is flowing into US equity mutual funds, it will help
push-up stocks and help the major indexes stay above certain support
levels. If money is flowing out, mutual fund managers will need to
liquidate stocks to satisfy requested distributions and their selling activity
will usually push the markets down. Below is the funds-flow chart from
January 2007 through August 2009. Note the heavy distribution in July and
Sep 2008 just before the October crash, as noted by the two red arrows, giving
us a warning that a severe market correction could be coming. On this chart we also
note how the In-flow of cash in April '09 through August '09 is "running out of
steam", thus giving us a warning that a market correction could be coming.
When cash is flowing out of US Domestic Mutual
funds, and if it is flowing into US Bonds, which are classified as a safe
haven investment, this provides us further information about investor
sentiment. In this case, it tells us that investors are worried about
the US economy and that they are moving their cash out of risky stocks and
into safe US treasuries.
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