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Aggregate Money Flow a Useful Stock Market Indicator?

| | Posted in: Sentiment Indicators

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”

“The Cost of Hope?”

“Do Hedge Fund Investors Chase or Successfully Time Returns?”

“Mutual Fund Investors Underperform Their Underperforming Funds?”

“The Timing (In)Ability of Mutual Fund Investors”

“Give Me Your Money Because…”

“Dumb Individual Investors and Smart Companies?”

“Returns for Investors (Rather Than Markets)”

“Smart Mutual Fund Investing?”

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:

“Mutual Fund Stock Selection vs. General Market Timing?”

“Hedge Fund Success: Timing or Stock Picking?”

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