More On Stock Mutual Fund Cash Outflows

Blogged last Thursday: 65 Billion Outflow From Long Term Equity Funds

This issue is getting highlighted in the press.

On LA Times blog: Stock mutual fund cash outflows hit 3-month high

• September 8, 2010 8:13 pm
  Investors pulled money from stock mutual funds in late August at the heaviest pace since late May, new data show.
  
  Bad timing: Many of the sellers were exiting just as the U.S. market was hitting seven-week lows -- and just before it rebounded at the start of September.
  
  No wonder so many people feel so frustrated by the stock market, and that they’ll never get it right.
  
  Net cash outflows from domestic equity funds totaled $7.6 billion in the seven days ended Sept. 1, the Investment Company Institute reported Wednesday. That was up from $4.3 billion the previous week and the biggest outflow since $13.4 billion left the funds the week ended May 26.
  
  Mutual fund net cash flows are total purchases minus redemptions.
  
  Gloom over the U.S. economy thickened in late August, driving two closely watched stock-investor sentiment gauges to their most bearish levels since March 2009 -- which was the month the market finally hit bottom after the 2008 crash.
  
  Severe negativity often is the best clue that the market is primed to stage at least a short-term rally, confounding the majority view. Of course, what seems like severe negativity can always get worse. It’s clear only in retrospect when sentiment has hit bottom.
  
  The Dow Jones industrial average closed at 9,985 on Aug. 26, its lowest since July 6 and down 6.7% from the summer peak of 10,698 reached Aug. 9. Given September's reputation as the worst month of the year for stocks, historically, no wonder some investors were anxious to exit.
  
  But after trading in a narrow range the last few days of August, the Dow surged 433 points, or 4.3%, from Sept. 1 through 3, boosted by some relatively upbeat economic data.
  
  On Wednesday the Dow added 46 points to 10,387.
  
  Although domestic stock funds’ latest net cash outflow was the largest since May, it just continues the pattern: The funds, which now hold about $3.6 trillion in assets in all, have suffered net redemptions every week since the end of April -- which was just before the May 6 “flash crash,” when the Dow plunged nearly 1,000 points intraday thanks to short-term traders (and their computers) run amok.
  
  Wall Street has done a fine job of driving average investors away, many of them probably forever.
  
  -- Tom Petruno

Regarding the bad timing statement.

• Bad timing: Many of the sellers were exiting just as the U.S. market was hitting seven-week lows -- and just before it rebounded at the start of September.

Nah.. I am not buying that statement.

Check out this posting: Reply From Kokanart: Have Times And People Really Changed?

Look at the charts posted. In regardless of whether the markets were going up or down, the investors were simply redeeming their money from their equity funds!

For example, from 8th June to 21 June 2010. SP on 8th June was at 1062.00 On 21st June 2010, it closed at 1113.20 (it hit a high of 1131.23 on 21 Jun). SP rallied some 51.2 points or 4.8%. And the net redemption during this 'hot' period was some 3.1 Billion.

And then from 2nd July to 9th Aug 2010. SP rallied from 1022.58 to a closing of 1127.79 on 9th Aug 2010. A 105.21 point rally! Was there any money flowing back into the equity during this GRAND run? Nope! The investors redeemed another 11 Billion!

My flawed view?

It does not matter if the markets is going up or down, the investors just want out of their stock mutual funds!

Here's another article: http://www.onwallstreet.com/news/schapiro-flash-crash-2668667-1.html

• "Retail broker-dealers have told us that individual investors have pulled back from participating in the equity markets since May 6. Indeed, according to mutual fund data, every single week since May 6 has seen an outflow of funds from equity mutual funds,” Schapiro said. “The trend is troubling.”

Schapiro then talks about the HFT! ( Finally! )

• However, echoing a recent report from Ned Davis Research, the SEC chairman lay much of the blame for the massive outflows on the credit crisis.
  
  As a result, besides revisiting circuit breakers, the SEC is considering requiring high-frequency traders and dark pools to bring liquidity to the market in times of great stress.
  
  Schapiro noted that a decade ago, 80% of U.S. equities were traded on the New York Stock Exchange, while today, the NYSE handles a mere 26% of that volume—with the balance split among 10 public exchanges, 30 dark pools and more than 200 proprietary trading desks at broker/dealers.
  
  “Nearly 30% of volume in U.S.-listed equities is executed in venues that do not display their liquidity or make it generally available to the public. The percentage executed by these dark, non-public markets is increasing nearly every month,” Schapiro said.