Short-term Outlook (1-5 Days):  Neutral  Since July 20, 1057 SPX

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Equity Indicators - Updates and Extremes

Mutual Fund Flows

The flow out of equity funds and into bond funds over the past year has been well-documented in the media.

This week, while equity mutual funds didn't show too much of an outflow (-$961 million according to Lipper FMI), exchange-traded funds did.  When including both mutual funds and ETFs, equity funds lost -$9.1 billion.

That's one of the largest one-week outflows since the summer of 2002.

The table below shows the S&P 500's performance during the next month after the other times the outflow reached -$9 billion or more.  The stats use weekly closes.

There was only one loss among the sample, otherwise the gains were fairly impressive, even during a rocky overall market.

One caveat is that during many of those weeks, we had also seen a large exodus from plain old mutual funds.  That's not so much the case this time around, as most of the outflow was due to an exit from ETFs.  It's still a sign of pessimism; it's just not as strong as it would otherwise be.

Hindenburg Omen (one more time)

When you're able to get an arcane, data-mined technical analysis signal mentioned on the Drudge Report and basic cable television, then you know you've named it correctly.

The hype surrounding the Hindenburg Omen reached feverish proportions this week, and it was fascinating to watch.  People didn't really care why the signal portended a market decline, they just liked the cool name.

Anyway, many have suggested that the Omen is not effective unless it is confirmed by a second signal.  I personally don't believe that's the case as we discussed last week, but again it seems as though almost everyone has a different interpretation of these rules and their efficacy.

For what it's worth, the table below shows the S&P's performance after we got a second Hindenburg Omen signal within two weeks of the first one (I've excluded any that occurred on back-to-back sessions).  The "Max Gain" and "Max Loss" columns show the S&P's best gain and worst loss during the next three months.

Again, the signals were mostly effective at highlighting high-risk times in the market.  There were only three times the index showed a gain three months later, and the maximum risk was nearly four times greater than the maximum reward.

The median number of days it took to reach the trough during the next three months was nearly 40, or almost two months.  There was one time (December 1991) when the market bottomed immediately, but otherwise it took at least two weeks and as long as three months for the worst to pass.

I don't buy into the idea that this signal has lost any effectiveness because it got such ridiculous media attention.  The signal is what it has always been.  If we saw some kind of stampede out of stocks because of it (well, perhaps the mutual fund flow data above is one suggestion of that...) then that would be a different story, but I still consider it an intermediate-term negative here.

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