Do they know something we don’t know?

Written by John Osbon on September 28, 2011

What can we learn from fund flows – the movement of money in or out of securities? Do the recent outflows (see the Bloomberg article “Fund Outflows Top $75 Billion,”) signal a falling tide for equities, or an opportunity to buy?  Or neither? Let’s take a closer look.

Three investments, three stories

It’s quite revealing to look at the price performance and money flows of the largest ETFs, SPY, BND, and GLD.  Not only are they among the largest and most actively traded ETFs, they represent three very different asset classes: stocks, bonds, and alternative investments (gold).

SPY

Click image to enlarge. Source: Yahoo Finance.

 BND

Click image to enlarge. Source: Yahoo Finance.

GLD

Click image to enlarge. Source: Yahoo Finance.

The top segment of each of these charts shows price movements. The smaller graph at the bottom of each chart shows fund flows, a technical indicator that captures the direction of flows in or out of a security. In all three of these assets, money flows look like an oscilloscope gone awry, with money flowing in and out with little apparent connection to price.

False signals everywhere

Fund inflows and outflows are one of those information stories without meaning, in my opinion.  Let’s take GLD as an example.  Anyone who has sold gold in the last ten years, expecting a meaningful reversal in price, has been wrong. Same for BND.  Prices of those two securities have gone up, nearly without interruption. Traders may love to trade short term in pursuit of profit, but they would be hard pressed to match the performance of buy-and-hold BND and GLD.  You would have to be nimble beyond belief to catch the small short-term moves, and I don’t see that the money flow indicator would be much help in doing so.

Moreover, the flow indicator can give a major false signal, as BND showed big outflows in February 2011, on the eve of one of the greatest bond rallies ever. As the Bloomberg article indicates, many individual investors dump securities near market bottoms, because they just can’t endure any more anxiety.

More information doesn’t mean more intelligence

Up, down, rescue, collapse, cooperation, filibuster, promise, despair. Whether it’s Greece, Congress, or what to do about the economy, we have more information than ever, but I would argue no more basis on which to predict the direction of markets. One could even argue that all the conflicting short-term information we have reduces our ability to make sound long-term decisions.

Maybe it’s time to take a deep breath, get a good night’s sleep, or read a good book instead of paying so much attention to the news cycle.  The news and market data are too full of false signals, in my opinion.

 


 

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