Mutual Fund Cashflows Suggest An Oversold Condition Prevails In Equity Markets

Includes: DIA, QQQ, SPY
by: Daily Trading

Equity markets are more or less at multi-month highs but equity mutual fund flows are still negative! Isn't this a very bearish sign for stocks as they are moving higher on "thin air"? Contrary to popular belief this is actually a very bullish sign as it suggests that equities are increasingly being transferred to "strong" hands from "weak" hands. It also suggests that equities remain in an extreme oversold condition. Granted no indicator is perfect but from the graph below you will notice that oversold conditions in the market coincide with negative cashflows into mutual funds.

ICI Net Cashflows into Growth Equity Mutual Funds

Click to enlarge

Not until I see evidence of the average retail investor piling into equity mutual funds will I entertain the idea that equity markets are overbought. We have a long way to go before moms and pops get excited about the equity market and become fully invested in "risky" assets.

A bull market creeps up on you when you least expect it. Perhaps the growing chorus of investors calling the market "overbought" is a contrarian sign in itself, a sign that investors are still scarred from the volatility of the last two years and do not believe that equity markets can move materially higher. I think that equity markets will move materially higher over the coming months, accordingly I see any weakness as a buying opportunity rather than reason to sell.

Disclosure: I am long DIA.