Short-term Outlook (1-5 Days):  25% Bearish  From May 14, 1150 SPX

Go to:  Top  |  Short-term Outlook  |  Int-term Outlook  |  Equity Updates  |  Indicator Summary  |  Commodity Updates

Go to:  Top  |  Short-term Outlook  |  Int-term Outlook  |  Equity Updates  |  Indicator Summary  |  Commodity Updates

Equity Indicators - Updates and Extremes

Mutual Fund Flow

At the end of April, we took a look at the percentage of assets that mutual fund portfolio managers were holding in cash, which had sunk to a new all-time low of just 3.4%.  While that could be justifiable given the current level of short-term interest rates, it can still cause problems if investors suddenly start pulling out money.

Why?  Because if a fund manager is hit with a wave of redemptions - nowadays some fund managers can see that on a real-time basis - and they don't have enough cash on hand to meet those requests from clients, then what are they going to do?  The only thing they can do - sell stocks.

According to Lipper, perhaps that's a problem here.  Investors have started to pull out of equity mutual funds, with a $4 billion outflow through Wednesday.  That's the largest one-week flight since February/March of 2009.

Taking a wider view, this week's outflow is large, but by no means the largest we've seen.  During the worst of the prior bear markets, weekly outflows were double or triple what they were last week.

It's possible that last week's flight from equity funds was so great that it's a contrary indicator.  The biggest problem with that theory is that mentioned above - if the wave of redemptions continues, then fund managers may have to resort to selling stocks to meet them, which leads to a vicious self-feeding pattern of lower equity prices.

This weekly chart just moved up on my scale of what's important to watch in the coming weeks.

Rydex Sector Funds

I've received a few questions about the flow of funds among sectors in the Rydex mutual fund family.

What has triggered curiosity is that the Precious Metals fund hasn't seen much of an inflow in actual dollars, yet as a share of total sector assets, its allocation has climbed up to 25%.

The reason is because of what we looked at on Wednesday - traders have fled almost everything else.  Just by default, the fact that Precious Metals hasn't suffered a big outflow means that it enjoys a bigger slice of a smaller pie.

I wanted to check for any other time we've seen Precious Metals take up more than 25% of the total, while more than 80% of all sectors had assets less than their 50-day moving average.  Turns out there were only a few other instances.

The idea is that during these times, we're seeing the proverbial flight to safety, where the only perceived haven is gold.

And except for the tumult in the fall of 2008, that kinda-sorta panic resulted in higher prices in the S&P.  The gains were not necessarily immediate - stocks continued to fall for 1-3 weeks in March 2003 and 2009, but looking out three months or so the returns were extremely positive.

This fits with most of the other studies we've looked at during the past week, in terms of possible (probable) short-term weakness, but better chances for higher prices over the next 1-3 months.  The wild card, as always, is if we're rolling over into a new bear market, but there is no evidence of that likelihood yet.

Go to:  Top  |  Short-term Outlook  |  Int-term Outlook  |  Equity Updates  |  Indicator Summary  |  Commodity Updates