Stock Funds Shed $29.29 Billion

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Scary Roller Coaster

Stocks drop because there are more sellers than buyers. When this happens, the market makers are forced to buy, and as they do they lower the price. My maternal grandfather, Donald Mortlock, worked as a market maker on Wall Street. If you understand how the price moves when there are more sellers than buyers you also understand that at some price the market finds resistance and the markets stop dropping.

Paul Katzeff of Investor’s Business Daily wrote at the end of last month an article entitled, “Stock Funds Shed $29.29 Billion.” In that article he wrote:

Investors pulled $29.29 billion from stock funds in August, as the market fell.

It was the fourth straight month of outflow and just 5.6% short of July’s $31.06 billion, according to the Investment Company Institute. It was also the seventh highest monthly outflow since the ICI began tracking flow in 1984.

Signs pointed to a slowing of outflow this month.

Here is the chart from Paul Katzeff’s Investor’s Business Daily article. I have highlighted the outflows of 83.31 billion for the past three months in purple ($22.96 + $31.06 + $29.29).

Tracking Fund Flows 2011-09-30

As you can see from this chart, $83.31 billion is a lot of outflow from stock mutual funds. Stocks drop when there are more sellers than buyers. And when there are outflows like this stocks drop precipitously. But the dropping can’t go on forever. Ultimately resistance is met.

The ads for gold always bother me with their line, “Gold has never been worth zero.” Well, the markets have never been worth zero either. If the markets approached zero I would take the chance in my pocket and own every company in the world. Resistance is reached long before then. And the markets have never had a 22 year downward slide from $850 an ounce down to $230 an ounce like gold did between 1980 and 2001. Gold lost 69% of its value over a 21-year period for a consistent annualized loss of 5.5%. The markets have never done something even close to that.

So, no, this summer’s market drop will not continue in a straight line downward. This is not the end of capitalism as we know it. The markets are not hopelessly broken. And the world will not end in 2012. I think I’m the only person to make the news predicting that the world will not end.

This is, however, a good time to  rebalance your portfolio. Rebalancing at this time means selling bonds and buying stocks.

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  4. Exchange Traded Funds
  5. Sage Advice After Stock Market Drop

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.

2 Responses

  1. Vern
    |

    I hope you are right & are paying attention to what you are saying .

    I like playing strategy as well but know both Chess & Bridge have different ways of being played even if the rules are the same . Ive seen what Caplin Sheinwald can do to an unsuspecting Gorem bidding system .

    The same goes for Chess . Different moves require different counters .& there are many opponents playing the market at the same time & their rules are open to interpretation .

    Best to ya
    Vern

    • David John Marotta
      |

      There is a great deal of momentum movements in the markets. Momentum can continue irrationally making it impossible to predict. That’s way the markets are inherently volatile.

      Sometimes when there are more sellers there is a month of outflows, popular sentiment sees a buying opportunity and it ends after one month. Sometimes there is a second month. Sometimes there is a third month. What you are waiting for is the last investors who is going to sell to throw in the towel and sell. That is usually a heavy down day and is called “capitulation.” As I wrote this blog post October 3rd the S&P had dropped to 1,099.23 and the Dow and dropped 257 points to 10,655.30.

      It reminds me of that Dr. Seuss quote:
      “The storm starts, when the drops start dropping.
      When the drops stop dropping then the storm starts stopping.”