Even as Market Jumps Higher, Investors Head For Exits

Perhaps the past week's stock market rally was only a mirage: Fund-flow data showed retail investors ran for the exits even as the major averages were gaining nearly 4 percent and staging their biggest surge in months.

Equity investors pulled nearly $12 billion out of mutual funds for the week ending July 7, nearly matching the entire month of May, when the Standard & Poor's 500 fell 8.5 percent and dropped into correction territory off the April 23 high.

Though some mutual funds reflect institutional investor holdings, they are considered a strong barometer of retail investor behavior.

So with $11.6 billion leaving the market in one week, investment pros are suspect about the quality of the rally.

"This looks like a short-covering rally," says David Twibell, president of wealth management for Colorado Capital Bank in Denver. "You have a big up day, decent follow-through, but not much volume, not much conviction, and it's hard to find a catalyst for any of it."

Fund data indeed paints a fairly gloomy picture for US stocks as earnings season kicks into gear next week and investors look more towards outlook than quarterly performance.


While domestic equity funds, excluding exchange-traded funds, saw outflows of $2.056 billion, foreign funds saw inflows of $78 million, and emerging market funds saw $142 million in net inflows, according to Lipper data.

Bond funds, meanwhile, saw a net inflow of $2.3 billion as investors continued to seek the safety of debt—government and otherwise—despite its anemic yields.

And money market funds, which make for an even less profitable investment at virtually zero interest, saw inflows of $17.83 billion, pushing the money-on-the-sidelines figure to $2.83 trillion, according to the Investment Company Institute(Lipper data put the weekly inflows figure even higher at $18.45 billion).

The data reflects a continuing tug-of-war between market bears and bulls, with the bulls able to push the averages higher but the bears unwilling to put any faith in the market. Stocks looked for direction through most of Friday, moving slightly higher entering the final hours of trading.

"You almost get the feeling it's a big vote of 'no confidence' in the developed markets. People have bought the emerging-markets growth story," says Brian Gendreau, market strategist with Financial Network Investment Corp., based in El Segundo, Calif. "There are people out there thinking that 'all this pessimism is overdone, but I'm going to get off the tracks until the trains go by.'"

There is growing belief that investors have lost faith in a market that seems to have shed some of the stabilization it had found after the credit crisis.

Looming issues such as high unemployment that won't go away, uncertainty over European sovereign debt, and the integrity of the market after the May 6 flash crashcontinue to weigh on investors' minds.

The June funds data also could reflect investor fear after the market's May slide, in which $12.8 billion left equity funds for the entire month.

"Real people are nervous, they're worried. They didn't make all their money back (after the financial crisis)," says Kathy Boyle, president of Chapin Hill Advisors in New York. "You lose that much money in a month and it scares you."

The result, market watchers say, is that stocks could well go sidewise for a while until some greater catalyst comes along—surprises in earnings, a change in tax policy, or some clarity from Europe to name a few.

Without any of that, there's a pervasive feeling that rallies are to be sold and down days are to be bought.

"What is really going on is that we are seeing a technical bounce from oversold conditions, and anyone treating this as the onset of a new bull market is probably in for some real major disappointment," Gluskin Sheff strategist David Rosenberg said in his daily briefing.

Still, market sentiment has been wrong before, and there are many pros who will use investor sentiment surveys and fund flows as contrarian indicators.

Even then, however, there's little guidance lately.

After a sustained run with the bulls, the latest Investors Intelligence survey does nothing more than reflect market myopia: Bulls outnumber bears for the week ended July 6, but only by 37 percent to 35 percent. That represents a trend toward bearishness from earlier surveys, but not dramatically.

The result does, however, portend investors continuing to stay away from an uncertain market.

"There are a lot of people who over the course of '08, last year, this year, who have just completely lost confidence in the market as being a way for them to save and invest money as a retail investor," Twibell says. "They see these huge moves and this Flash Crash. It's a psychological blow to a lot of people."