This Indicator Is Sending an “Undeniable Buy Signal”

At first blush, now seems like a terrible time to buy stocks…

Global economic concerns are mounting as European countries appear to be racing each other to see who can default first.

The market is clearly trending in a bearish direction. The S&P 500 index is down 11% since April and in negative territory for the year.

Not to mention, volatility is spiking, too. The widely followed “fear index” – the VIX – jumped 50% in early August to 48. And more than a month later, it’s still trading above 30, which is about 52% above the index’s long-term average of 20.43.

But you know what? There’s one decidedly positive sign in the market. Mutual fund flows. And they’re sending an undeniable “Buy” signal. Let me explain…

Never Go With This Flow

Investors are notorious for poor timing. They sell stocks when they should be buying. And they buy stocks when they should be selling.

If you have any doubt, just consider the circumstances leading up to the beginning of the current bull market…

In the five months following Lehman Brothers’ bankruptcy in October 2008, investors yanked $72.8 billion from equity mutual funds. And right as those withdrawals peaked – wouldn’t you know it? – the S&P 500 index bottomed out and went on to double in price in record time.

Or as Brian Barish, President of Cambiar Investors, LLC, said, “The five months after Lehman was an epic buying opportunity, yet investors liquidated en masse.”

To borrow Mr. T’s catchphrase, “I pity the fool.” Because investors are bailing en masse again.

In the last four months, investors pulled about $75 billion out of stock mutual funds, according to data from the Investment Company Institute and EPFR Global.

Of course, bears will tell you that the data warns of even more stock price declines. Too bad history doesn’t jive with that conclusion.

You see, the last time equity fund flows topped $40 billion over a four-month period, stocks rallied 13% over the next three months. Moreover, the last seven times equity fund flows topped $10 billion in a month, stocks rallied the next month in five of those cases, or 71.4% of the time.

Add it all up and I’m convinced that the latest mutual fund flow data suggests we’re on the cusp of another “epic” buying opportunity.

Is that a contrarian stance? Heck yeah! But it’s one emboldened by underlying company fundamentals.

Consider:

* Corporate Profitability: Companies in the S&P 500 have beaten profit estimates for 10 straight quarters. And analysts are calling for another 18% increase in profits this year.

* Fiscal Health:Over the last three years, companies have been paying down debt and hoarding cash. In fact, the S&P 500′s net debt to EBITDA ratio is down to 2.5 from five over that period. And non-financial companies reported their eleventh consecutive quarter of record cash holdings – at about $1 trillion – according to Standard & Poor’s Howard Silverblatt.

* Valuation: Stocks are cheap, trading for just 13.5 times earnings.

Bottom line: The average investor is notorious for poor timing. And right now they’re focusing on the scary headlines and increased volatility and running for the exits. But history clearly suggests we should be doing the opposite.

Ahead of the tape,

– Louis BaseneseSource: Wall Street Daily

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