Canadian investors have pushed the panic button too. An estimated $4.5 billion was pulledfrom Canadian mutual funds in September — a massive outflow that sweeps far beyond the previous redemptions peak of $1.7 billion in April, 2003.
Mutual-fund sales are a contrarian indicator of the stock-markets direction for many investors. Look at how the previous peak of $1.7 billion roughly coincided with the end of the last bear market. If Septembers redemptions are more than double the latter, might the bottom to the current bear bottom be at hand?
Its important to look at the data carefully and to consider the current context. First, approximately half of the September outflows were from money market funds — so the flight from stocks was actually closer to $2.25 billion. That still beats the record, but by a smaller margin.
Second, a number of fund companies reported net inflows of money. As Som Seif, of Claymore Investments points out, this had a lot to do with new product offerings, i.e. segregated mutual funds used in variable annuities such as Manulife Financials IncomePlus.
People buying these popular instruments are looking for retirement income indexed to the upside of stock markets but protected from the downside — so to get a purer measure of sentiment, these inflows should be netted out. Roughly extrapolating from past data, the adjustment would bring industry net outflows closer to $3-$3.5 billion in September.
Thus, we may indeed be getting near the point of maximum pessimism and the bear markets bottom. A caveat, though, is the once-in-a-lifetime nature of the current financial crisis, a five standard deviation event in which traditional signals and yardsticks may no longer be reliable guides.