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Good News, Bad News: Stock Fund Inflows Rise

While some see it as bullish, others say look out below.

With war fears receding, investors' interest in the stock market has reawakened, and for the first time this year the amount of cash flowing into equity funds has risen for two straight weeks. More money, however, is no guarantee of higher prices.

Net inflows into stock funds rose to $6.7 billion for the week ended April 16, according to TrimTabs, the biggest positive inflow in the last 12 months. AMG Data, another provider of market statistics, said $5.7 billion was moved into equity funds in the week ended last Wednesday.

While some have suggested the trend has boosted stocks over the last few sessions, positive inflows do not necessarily mean stocks will do what investors want. In fact, if history is any indication, money moving in and out of stock funds is often just a knee-jerk reaction to what has already happened to stocks themselves, or, at worst, a contrary and bearish indicator for what could be coming.

"Net inflows are not a major determinant of what stocks will do," said Paul McCrae Montgomery, a market analyst and publisher of

Universal Economics

, an institutional newsletter. "The public is just chasing performance." McCrae cites the early '70s as a period of mismatch, when equity funds bled cash but the major indices experienced gains.

Moreover, according to Investment Company Institute, a trade organization of mutual funds, for the past three years April has been a favorable month for equity funds, in each instance followed by yearly declines in stocks. Since 2000, the flows went from negative to positive in the month, reaching plus-$26 billion in 2000, plus-$19 billion in 2001 and plus-$12 billion in 2002. But in all three years, despite strong Aprils, the

S&P 500 Index

lost ground: 6%, 13% and 23%, in that order.

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Still, some experts believe that the move this year could carry more significance, and that real money could be coming off the sidelines. Indeed, money market mutual funds -- a decent proxy for cash -- had net outflows of $29.3 billion in the same week ended April 16, according to the Investment Company Institute. The report shows total assets in money market funds have been declining since the start of the war, from $2.3 trillion in late March to $2.2 trillion by mid-April.

Charles Biderman, chief executive officer at TrimTabs, also notes that there has been a dramatic shift from the $100 billion that flowed out of stock funds from March to June 2002.

"Equity fund inflows are a lagging indicator and, in extremes, a contrarian indicator. But not at the start of a cycle. Then, they could signal a trend," said Biderman. He says that, although mutual funds have seen inflows, most of the buying now is being done by institutions, and that the retail investor remains skeptical of a turnaround.

Biderman notes that within mutual funds, cash levels are at eight-year lows, suggesting managers are relatively bullish (although they are paid to be bullish). Coupled with companies buying back their shares at a good clip, "more money

is chasing fewer shares, and this could signal the beginning of a bull market."

Nonetheless, many experts approach positive inflows with caution. Since the latest data suggest that investors were encouraged by the rally that occurred before and during the war, many effectively bought high.

"Investors get in after the market has made a significant gain, and get out after it has lost ground. That diminishes average returns," said Montgomery of

Universal Economics


As for telling what the future holds by fund flows, experts are unconvinced. Cary Nordan, equity analyst at BB&T Asset Management, which has $11 billion in assets, says: "The inflows we're seeing into mutual funds are probably hot money. When there's a steady trend, then we would have made the transition into a positive market. For now, we are still in the confirmation period."