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.

The fund flow figures, released Friday by Lipper, revealed some interesting trends. Bond funds eased a bit from March but remained strong, taking in $9 billion -- including $6 billion into high-yield, or junk, bond funds. Meanwhile, money-market funds witnessed $55 billion in outflows -- a large sum partly explained by withdrawals made to pay Uncle Sam this tax season. However, some of that money went into the $14 billion received by stock funds -- even the so-down-they're-up tech and telecom fund categories saw modest inflows amid heady stock market returns.

Indeed, tech and telecom funds had a bang-up April. Buoyed by bull signals from Broadcom ( BRCM), Nokia ( NOK) and AT&T ( T), telecommunications funds rose 9.57% in the month -- "mildly reminiscent of the two-month double-digit surge in the fourth quarter of 2002," Lipper noted. Tech funds, meanwhile, surged 9.91% on average, amid positive news from eBay ( EBAY), Intel ( INTC) and IBM ( IBM), among others.

But as Lipper noted in a recent news release, these two sectors remain among the priciest in terms of price-to-earnings multiples. Tech-sector funds sport a 55 P/E multiple on average.

Lipper's Cassidy noted that while much of the inflows went to more cautious areas such as balanced funds, REIT funds and income funds, he was surprised that growth funds gained new money in April. Putting money into growth funds is, in effect, making a bet that the economy will post a strong recovery. "My personal scenario is that the economy will remain soft," he said -- not the conditions that would benefit large growth stocks.

Cassidy found little genuine leadership among large-cap stocks to signal a sustainable turnaround. "Forget tech for the moment. If you look at Johnson & Johnson ( JNJ) or Coca-Cola ( KO), even they have P/Es in the mid-20s. Why rush to get in now?"

Not a Sure Bet

Of course, fund flows aren't a surefire contrarian indicator. In the latter half of the 1990s, wads of new money going into stock funds were followed by wads of stock appreciation.

Ratkai and others counsel investors not to time the market solely on the basis of fund flows. "They offer a big lens to judge approximately if people are feeling bullish or bearish," he said. But other technical measures are pointing to near-term weakness, including the percentage of S&P 500 stocks trading above their 10-week moving average.

Clay Allen, an adviser and provider of institutional research in Denver, tracks stocks' 10-week moving averages. When more than 80% are above their moving average, he considers the market overbought and poised to retrench. At recent levels, 94% of S&P 500 stocks are trading above their 10-week levels -- "it's off the charts, the highest levels since three years ago.

"It's one thing to hope for a big breakout, and it's quite another thing to actually get one," Allen said.

Riding the Seesaw

Longtime ( ACRNX) Liberty Acorn fund manager Ralph Wanger notes that the $14 billion in inflows for April isn't an enormous amount, and that the rally "may have more upside room." However, he flatly rejects any effort to time the market.

He also noted that fund flows recently have reflected that investors put too much emotion into their investments. "The market goes down a couple months, they get pessimistic and pull their money out just as it bottoms. When it goes up for two months, they start putting their money in just as it peaks," he said.

Wanger, who recently announced he would retire later this year, believes the S&P 500 will remain in a giant trading range between 600 and 1500 for "quite a long number of years." His answer to the seesaw volatility: the ( COTZX) Columbia Thermostat fund, which has taken in $25 million since its March inception.

Thermostat is a "fund of funds" that operates on a mechanical formula, automatically lightening up on stock-fund holdings and adding to bond-fund holdings after equities run up, and vice versa. "It's for people who are so jaundiced by Wall Street that they would rather have a machine run their investments," he said, joking, "I can't imagine why people would feel that way."

No one has a crystal ball to divine what the latest inflows foretell, but Cassidy suggest investors pay close attention to the economy. If consumer confidence picks up and businesses increase capital spending, "growth funds should continue to outperform." However, if business investment lags, value funds should resume leadership. "As the last two years have taught us, investors should wait for more proof that capital spending is in fact in the midst of a rebound before again making the leap to growth," Lipper noted recently.

Meantime, Cassidy said he expects to see smaller inflows in May. "April was a special case where you had wonderful news. But I have a hard time imagining it signals a return to a runaway bull market that will make you 20%."

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