Investors are stuck in the same mindset they’ve been in for weeks… sell, sell, sell.
Folks want access to cash during tough times. So they’ve been selling stocks to raise cash they can keep on hand.
This isn’t typical selling, though. Equity mutual funds are experiencing the biggest outflows in their history. Over the last six months, we’ve seen an average of $40 billion in outflows from these funds.
These massive outflows are a great contrarian signal.
It means stocks should head higher in the coming months.
Let me explain…
The COVID-19 crisis came on swiftly, crushing the market.
Stocks have recovered since the bottom in March.
They’re less than 10% below all-time highs right now.
But investors are still scared.
They’re stampeding out of equities. The easiest way to see this is through total equity mutual fund flows.
This is a real-time indicator that helps us gauge investor sentiment. After all, in the investment world, people show their emotions with their wallets.
When folks are scared, they pull money out of the market. And when they’re excited, they buy stocks as fast as they can.
Today, we’re seeing money rush out of stocks. The chart below shows the six-month average outflows from equity mutual funds around the world. Take a look…
Money has been flowing out of equity mutual funds for years. But today’s outflows are the largest they’ve been in more than 25 years. And we’ve only seen outflows like these a handful of times since 1995.
We saw similar cases in 2002, 2008, 2012, and 2016… all of which were terrible times to pull money out of stocks.
In fact, each one of these instances turned out to be a great time to buy U.S. stocks. Take a look at the table below…
Buying after record outflows from equity mutual funds led to double-digit gains every time. Even more, each one of these occurrences happened right before a multiyear rally in U.S. stocks.
This is why contrarian investing is so powerful. By figuring out what the crowd is doing and making the opposite bet, we set ourselves up for big, long-term gains.
Right now, investors are hitting the panic button. We’re seeing record outflows from equity mutual funds around the globe.
That negativity is a good sign, though. It means the bottom is likely behind us. And it should create a major tailwind for U.S. stocks as prices rise and money starts to flow back into these funds.
Combine this with the fact that the trend is back up in stocks… and our action becomes clear. It’s time to buy.
Good investing,
Chris Igou
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Source: Daily Wealth