While investors withdrew a record $49 billion from equity mutual funds in July, according to Lipper, the news isn't all bad.

The record outflows in equities in July could signal a capitulation, or bottom, to the current bear market, which gives hope to a potential sustainable rebound. "This was classic crowd behavior, probably marking a significant market bottom," said Don Cassidy, a senior research analyst at Lipper of New York. "Several million investors gave up at virtually the same time, just as the selling climax in stocks that ended the morning of July 24 showed."

The $49 billion withdrawal in July follows $13.8 billion in equity fund outflows in June, according to Lipper [see MFMN 7/29/02]. The previous record for outflows was $30 billion last September, with the terrorist attacks a major factor.

Mutual funds saw $45.8 billion in net outflows in June, setting another record for the worst month ever for mutual fund flows. Those losses followed $27 billion worth of inflows in May [see MFMN 6/24/02].

The Bond Connection

Meanwhile, investors shifted their money into bonds in July, as bond funds set a record for largest monthly net purchases at $19.2 billion. Also, money market funds took in $31 billion. Between the outflows in equities and the inflows in bond funds and money markets, mutual funds had total net inflows of $1.2 billion for the month.

"There was virtually indiscriminate selling across the board in equity funds," Cassidy said. "Further evidence of the haste with which investors dumped their stock funds [was] the $31 billion" of net inflows into money funds, particularly "in light of very low interest rate returns." While money was leaving equity funds, it was flowing into fixed income funds at a record pace. The $19.2 billion inflow in July beat the $15.4 billion total of August 2001. Those funds that focus on the shorter-maturity asset types were the ones grabbing the new dough.

Balanced funds had $3 billion go out the door and equity income funds lost $1.1 billion. Sector funds didn't fare well, either. The science & technology funds group and health/biotechnology funds both suffered outflows of more than $1 billion. Only Real Estate, mainly REIT-holding funds, had net inflows, and it was a scant $10 million.

Hitting Rock Bottom?

Over the past year, many on the Street have called bottoms to the bear market and have been dead wrong. And while there is no way for sure to say we've hit a bottom, there are many telltale signs, according to Cassidy. "My sense is that this is the bottom. We've had several of these little down-legs. We've had a number of them, and that means you're more likely near the end than the beginning."

Bottom-calling "is not a science. It's an art. But it works," Cassidy said.

While there is no sure way now to be certain if this is the bottom, one of the factors Cassidy pointed to was the volume of exchange traded funds, such as the S&P 500 depository receipts. At each new low, or major dip, their volume has doubled, which Cassidy says is an indicator that this is, at long last, a bottom.

He said the best way to test if this is the bottom in the upcoming weeks is to watch the market's ability to withstand bad news. In a bottom, the people who are left still investing are generally those who are willing to ride out the storm. "You clean out enough people all at once who are willing to be scared out, so they aren't around to make the next little dip even worse," he said, adding that a fluctuation of a few hundred points off of bad news is not unexpected.

Further making his case, Cassidy pointed to how the "severe fear" in the market has spilled over to pop culture, including cartoons. Even late-night talk show hosts like Jay Leno now take a jibe at the market's ails.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.