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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

 

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