Mutual Fund Equity Flows - Are They Telling Us Something?

Interesting data from the Investment Company Institute gives us a sense of where America's retail investors are expecting the stock market to head.  The weekly cash flow data are estimates that covers 95 percent of the investment industry totals and the monthly flow data are actual cash flow numbers reported by the mutual fund industry.

Here is a graph showing the monthly net new cash flow for all equity funds (both domestic and world equities) since January 2007 before the Great Recession really took hold and gave equity investors a good shake:

It's quite easy to see how retail equity investors viewed the markets over the time period between 2007 and the end of 2013.  You can see massive net withdrawals during mid-2008 with net withdrawals of $70 billion in October 2009 and $50 billion in September 2008 as it looked like the market would never stop dropping.  There were also substantial withdrawals from June to December 2011 as the Eurozone crisis wound up and it looked like Spain, Italy, Greece and other debt transgressors could default and that the crisis could impact North America's economy.

What I do find interesting is the net increase in cash flow into equity funds over the past year.  Between January 2013 and December 2013, investors pumped $160.9 billion more into equity funds than they withdrew and invested a further $28.9 billion over the four weeks between the beginning of January and mid-February 2014 for a net total increase of nearly $190 billion.  This is by far the longest period of net positive cash flow into mutual funds since the beginning of 2007.

All of this makes me wonder if the "late converts" to the apparent strength of the stock market aren't tossing in their hard-earned cash trying to play catchup.

As shown on this chart, going back to 1932, the median bull market has lasted 60 months or five years with a range of between 14 months and 148 months:

The most recent bull market which began on March 9, 2009 according to Forbes, is just about to celebrate its fifth anniversary.  One has to wonder if all of the last-minute converts aren't now dumping billions of dollars into what could be a losing proposition, yet again, proving P.T. Barnum correct.  For those of us that are contrarians, the evidence is already in thanks to ICI's mutual fund flow data.