Going With -- or Against -- Mutual Fund Flows

Outflows also prove to be a lagging indicator. Once a sector gets so bad that individuals start exiting in droves, it usually leads to an area of the market that gets oversold.

That also explains why outflows as a percentage of assets can be misleading. Take the technology industry, for example. In 2002, technology outflows were a mere 10% of December 2001's asset base of $66 billion, Cassidy says. "But the value of tech funds have halved as well," he notes. "So it's really more than $6 billion in outflows based on assets of $30 billion or so."

In other words, technology fund outflows are greater than the percentage of last year's assets would indicate.

Still, fund flows do reflect investor sentiment. And that sentiment is moving tentatively towards equity investing again.

Stock funds had an inflow of $6.46 billion in November, according to the Investment Company Institute. Not bad, considering the $7.5 billion outflows of October. Through November, though, stock funds have seen a net outflow of $19.87 billion, or 0.7% of average assets. The last full year during which stock funds had net outflows was 1988, when 8% of assets flowed out.