Aggregate Money Flow a Useful Stock Market Indicator?
Posted in Sentiment Indicators
September 17, 2009
A reader noted and asked: “Please look at the chart in “How Investors Lost Money: Evidence from Mutual Fund Flows”. Can money flows into the equity market at large predict (or ‘inversely’ predict) returns?”
Research showing that equity investors in aggregate materially underperform the market via timing of purchases and sales (aggregated money flow) is extensive. See the following:
“The Actual Return Experience of Hedge Fund Investors”
“Do Hedge Fund Investors Chase or Successfully Time Returns?”
“Mutual Fund Investors Underperform Their Underperforming Funds?”
“The Timing (In)Ability of Mutual Fund Investors”
“Dumb Individual Investors and Smart Companies?”
It is arguable that these studies imply that a strategy of buying after pronounced flows of money from the market and selling after pronounced flows of money into the market could beat the market (this implication is not the focus of the studies). Applied over fairly long intervals, this implication is in accordance with findings of long-term (multi-year) reversion in equity market returns. It is not obvious that aggregated money flow, an investor sentiment measure, adds information to that offered by returns alone (see “Purifying Stock Market Sentiment Indicators”).
Note that there is other research showing that even groups of expert investors (mutual fund managers and hedge fund managers) do not benefit from market timing (aggregated money flow). See:
You May Also Enjoy...
- Short-term Net Money Flow and Stock Returns
- Aggregate Buyback Activity a Useful Stock Market Indicator?
- Cash Flow Trumps Discount Rate in Stock Valuations?
- Classic Research: Separating Cash Flow and Discount Rate Contributions to Stock Returns
It costs less than a single trading commission. Learn more here.
