Of all the predictive tools, the axiom "follow the money" in order to divine truth probably holds most sway on Wall Street. Liquidity and asset allocation drive prices.
So when, according to the two firms tracking fund flows, investors show an enhanced appetite for stock funds, stocks themselves often rise, as fund managers look for somewhere to put the money. That could explain the market's recent strength.
According to TrimTabs Data, net inflows into mutual funds surged to $6.7 billion for the week ended April 16, the largest net inflow into all types of stock funds in more than a year. It's also only the fifth week since last June in which Trimtabs registered a net inflow into mutual funds.
The other leading firm, AMG Data, said its latest report showed a net inflow of $5.7 billion for the week ending Wednesday.
"The magnitude is not eye-popping," said Charles Biderman, TrimTabs' director of research, who noted that the level of inflows in March put the annualized rate somewhere around 1995's $100 billion. "This is far short of the $72 billion inflow experienced one week in March of 2000. But it does represent a dramatic shift from the $100 billion that left stock funds from March 2002 to June 2002."
Biderman also said there isn't enough data yet to define a trend. "This is still too early in the shift from money funds to call this a contrary indicator," he said. For one thing, the ratio of cash to stock is still at its lowest level in more than eight years. This means individuals and mutual funds still have plenty of ammo to send stock prices higher.
One drag that Biderman sees is pension funds' continuing appetite for bonds and aversion to equities.
"I think we're already seeing a tilt in the fulcrum between bonds and equities. Individuals and funds are leading the way, and more conservative groups such as pensions and insurers will follow, "says Ted Marks, a manager of the New Jersey-based money management firm Winter Capital.
Indeed, weekly flow of new cash into bond funds dropped $856 million in the latest period, from a four-week rolling average of $2.6 billion, according to AMG.
"This number by no means that represents a peak inflow that would accompany a market top and act as a contrary indicator," says Biderman. "Couple this data with stock buybacks, and I think we are looking at a healthy, steady liquidity environment for stocks, where we'll see more net buyers pursuing fewer shares."
Still, the fact that over $1 billion, or nearly 20%, of new investments went into aggressive growth funds raises concern among some experts. "Investors, and by extension funds, are going right back into the same tech stocks that crashed and burned. And while their absolute prices may be significantly lower, the values are nearly as rich as three years ago," opines William Rhodes, chief investment strategist with Rhodes Analyitics.