There is a negative divergence between prices and total assets in stock mutual funds. While prices have moved to all-time highs, the value of total assets in those mutual funds has actually fallen. How can this happen?
SPY components are exclusively large-cap stocks, while total assets in stock mutual funds presumably consist of a wide range of large- to small-cap stocks. The shrinking value of those assets can be caused by falling prices of the smaller-cap stocks.
Another cause is that assets are being removed from those funds. As we can see on the bottom panel of the chart below this has been the case. While prices have moved higher, stock funds have experienced negative cash flow for several months.
While it is not directly related to cash flow, the Mutual Fund Percent Cash reading has been useful in anticipating tops in the past. Below we can see that low readings in 2000 and 2007 coincided with important market tops. Unfortunately, this indicator seems to be broken, because readings have been persistently low since 2009. Perhaps improved technology has made cash management easier than in the past, but I don't really know. For what it's worth, the most recent reading is the lowest in 25 years.
CONCLUSION: Mutual fund statistics can help us evaluate the underlying strength or weakness of the market. Currently, total assets indicate that there could be weakness in smaller-cap stocks. More obvious, it is clear that money has been flowing out of stock mutual funds for over a year. None of these facts guarantee that prices will fall, but they exert a negative influence on the market.
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