Fund Flows May Signal Market Rally's Ebb

Money flowing into stock mutual funds turned hot in April. For market watchers who believe stocks will be range-bound for awhile, that's a big sell signal.

Investors poured $14 billion into stock mutual funds during April, the biggest inflow in a year, according to Lipper, a Reuters Company. The cash infusion signaled that the end of the Iraq war and the stock market's recent rally gave investors enough confidence to put money back to work in stocks. However, investors haven't exactly been spot-on in timing when to get in or out of the market in recent years -- and to market doubters, the flows may actually signal a retrenchment is coming.

"Investors tend to do the wrong thing at the right time -- I don't think the inflows represent well-timed money," Don Cassidy, senior research analyst at Lipper, said in an interview. "It really reminds me of October-November, and you know what happened then." In October 2002, after steep fund outflows in September, the market rallied off five-year lows, spurring a boost in fund inflows just before the market cooled again.

The bottom line: Unless the market is poised for a sustainable breakout, investors may once again be throwing good money after bad.

Tech and Telecom

"I think fund flows are going to become much more useful as a contrary indicator in this postbubble market," said Andy Ratkai, University of Denver professor and chief investment officer for Praxis Advisory Group. Ratkai believes the market will be in a trading range for a long time, meaning "the public is going to be sucked in and forced out of their mutual fund positions with greater frequency."

Ratkai said a look at the stocks that have seen momentum recently reveals the speculative nature of the latest bet on a market rebound. "Look at the volatility on companies like Lucent(LU)," which is up 65% since April 1.