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Canadian Market Indicators Flashing Bottom Signals

by: Larry MacDonald October 06, 2008    
Larry MacDonald

Larry MacDonald

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Canadian investors have pushed the panic button too. An estimated $4.5 billion was pulled from Canadian mutual funds in September — a massive outflow that sweeps far beyond the previous redemptions peak of $1.7 billion in April, 2003.

Mutual-fund sales are a contrarian indicator of the stock-market’s direction for many investors. Look at how the previous peak of $1.7 billion redemptions roughly coincided with the end of the last bear market. If September’s redemptions are more than double the latter, might the bottom to the current bear bottom be at hand?

It’s important to look at the data carefully and to consider the current context. First, approximately half of the September outflows were from money market funds — so the flight from stocks was actually closer to $2.25 billion. That still beats the record, but by a smaller margin.

Second, a number of fund companies reported net inflows of money. As Som Seif, of Claymore Investments points out, this had a lot to do with new product offerings, i.e. segregated mutual funds used in variable annuities such as Manulife Financial’s IncomePlus.

People buying these popular instruments are looking for retirement income indexed to the upside of stock markets but protected from the downside — so to get a purer measure of sentiment, these inflows should be netted out. Roughly extrapolating from past data, the adjustment would bring industry net outflows closer to $3-$3.5 billion in September.

Thus, we may indeed be getting near the point of maximum pessimism and the bear market’s bottom. A caveat, though, is the once-in-a-lifetime nature of the current financial crisis: A “five standard deviation event” in which traditional signals and yardsticks may no longer be reliable guides.

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This article has 3 comments:

  •  
    Oct 06 08:34 AM
    i'm glad you put the "caveat" in - never hurts, since it's all probabilities :-)
    Reply
  •  
    Oct 06 10:35 AM
    The Black Swan is airborne.
    Reply
  •  
    Oct 06 08:57 PM
    I don't think it would hurt to wait three or four weeks up upswings till
    some of these markets break into positive territory before making
    investments for a very long term growth. Canada still has plenty
    of good assets...if they can only get their act together and act
    responsibly toward their investors...
    Reply
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