For the week ending January 9, 2013, stock mutual fund inflows, as reported by Lipper, were $18.3 billion, which is the largest flow of money into equity funds since 1992 when such data had begun to be collected. And as I write this, stocks prices closed to their highest levels in more than 5 years. But what do these record inflows and climbing stock prices mean? Is the investor herd anticipating a positive year for stocks? Does this mean positive momentum for the market and thus represent a positive economic indicator? Yes and no.
Interpreting Mutual Fund Flows
The answer to almost every investing question one can imagine usually leads with two words -- "That depends." Perspective is everything. History shows that record inflows can mark the beginning of the end of a bull market. Equal and opposite, record outflows often indicate the end of a bear market.
This makes logical sense, at least in the contrarian investing because record inflows mean that more investors (or at least more dollars) are buying stocks, which usually indicates the a kind of blind optimism--the kind of optimism that sends stock prices much higher than fundamental analysis would indicate.
But where are we now? No one knows with certainty but you deserve at least some kind of payoff for reading this entire blog post! I'm not a market timer and don't recommend you do the same (see my 2013 Mutual Funds Portfolio) but I would not be surprised if stocks move their way to record highs, which only requires about a 5% gain, sometime in the next 12 to 18 months before a large correction or new bear market begins.