Investor confidence and market direction can be predicted just by watching the inflows and outflow of money from large mutual funds. When money floods the street, prices become inflated and stocks rise, an outflow causes large drops in stock prices as equity is taken out. After the last few months of decline, it is now apparent that outflows are huge. Investor confidence in big banking and anything related to mortgages are at all time lows.

A quick glimpse at a four week chart shows that equity funds tanked in February with the weekly outflows topping $12 Billion. Investors lost confidence in the market and thus started taking cash out of stock funds and at the same time loading up in money markets. While stock funds tanked, money market funds were taking in an extra $40 Billion a week. This shows that investors only felt safe in guaranteed return investments, even if the yield was as low as 3-4% per year.

Bond funds dipped at the same time as stock funds, either investors lost confidence in corporate holdings or they were wary of mortgage backed securities which are essentially mortgage debt repackaged as a bond. The monthly repayments of the mortgage were used to secure the bond interest, but as that money slowly dries up, the possibility of repayment drops.

Coincidentally the amount invested in money market funds has dropped with every FED rate cut, but the figures still remain positive. Net inflows to money market accounts were around $15-20 Billion a week, half as much as they were before the FED rates were dropped. Throughout the latter parts of February and into March, investors turned away from money markets and bought back into the market at bargain basement prices. Up until this week, there were heavily inflows of cash to equities of about $4 Billion a week, still much lower than money markets.

It appears that investors have again begun to take money out of equities and now back to money markets. From this viewpoint it looks like investors will start fleeing the market again, probably in droves when the Dow and other large indices drop. The impressive gains from last week are going to be wiped away if investors continue this sell off.

Watching these key statistics can help you better time the market. When the inflow/outflow statistics are weighted by a 4 week moving average, the charts flow smoothly. Very rarely do the charts move down and then back up, instead they move down and keep moving down or move up and continue up. This shows that the market is following the returns, investors don’t know where to put their cash.

Gauging just a few months history, equities are going to get killed in the coming weeks. Inflows topped at $7 Billion a week and now down to just $4 Billion a week, next week will probably go negative. If this continues, the next month will be filled with more 200 point losses. Hold on tight.