Mutual Fund Outflows Surge As NYSE Short Interest Back To March 2009 Levels... Yet Stocks Refuse To Plunge. Why?

ICI has reported the latest weekly mutual fund flow data and it is not pretty: the outflow from domestic equity mutual funds of $5.7 billion for the week ended September 30 is the largest since August 10, and is the 6th consecutive week of redemptions from mutual funds, bringing the total outflow YTD to $89 billion, following $98 billion in 2010. This is almost $200 billion in nearly consecutive weekly outflows from equity funds in the past two years, the bulk of which has gone into bond funds. Is there anyone who still thinks that retail has any interest in investing in stocks? But wait, there's more. According to the NYSE, short interest at the exchange soared to a whopping 15.7 billion shares as of September 15, an 828 million increase in one fortnight, and the biggest since the March 2009 lows. There is one difference: back then the S&P was 40% lower. Which means that the bear cavalry is positioned and waiting for a massive market flush... which keeps on not materializing.

Why?

Because these same mutual funds, despite having record low cash holdings, continue to refuse to sell their stock holdings and replenish cash. The only reason we can attribute to this is that slow money managers keep hoping Bernanke will pull something out of his sleeve and create another Hail Mary market rush into year end, saving quite a few P&Ls, not to mention careers. Alas, with stocks where they are it is increasingly looking like Operation Twist may be the only thing they will get for 2011 - Bernanke needs the S&P in triple digits to have a strong case for a $1-2 trillion LSAP. As such funds find themselves in no man's land, where they will be redeemed at the end of the year unless stocks soar for whatever reason, but will refuse to sell before they absolutely have to, which will be end of December, or whenever the Nash equilibrium fails.

So with less than three months left, every single day that does not result in a massive market move, brings stock ever closer to that proverbial flush which the noted shorts are so stubbornly waiting for. And with every passing day this equilibrium becomes more and more tenuous until one day the selling has to commence. Is it any wonder that hedge funds are now overwhelmingly bearish and also waiting alongside the bear cavalry to scoop up the firesale which should begin if Bernanke does nothing but sits on his gluteus maximus?

NYSE short interest:

Domestic Equity Mutual Fund flows:

Mutual Fund cash balance: