Could dumb money be the new smart money?

Today the ICI released it's weekly mutual fund flow report. First lets understand that mutual funds are the home of dumb money, IRA's 401k's and just exposure to the market. Hedge Funds are where supposed smart money lives because they are accredited investors. Mutual funds have now seen 33 consecutive weeks of 34 of mutual fund outflows, meaning dumb money has finally realized that when the market goes down, nearly all long only (98% of Mutual funds) will lose money. This makes a cumulative total of $133 billion pulled this year after last week's 4 billion outflow. Dumb money seems to see where the market is headed and by their actions have created a self-fulfilling spiral of selling as hedge funds MUST sell portfolio holdings to meet the redemptions, so as the redemptions continue, so does the selling in the market, leaving the market at lofty valuations with very little or at least a lot less actual cash in the market to support these valuations.

It's no secret that hedge and mutual funds have badly underperformed this year, thus the high rate of redemptions as well as the trickery in the market, no one feels safe after MF Global's charade.

Just chalk this up to another negative for the market. The mutual fund money didn't flow out of the market during an epic crash, so it's not likely coming back and as for hedge funds, many of which counted sovereign wealth funds and foreign banks as their clientele is unlikely to see money return either as banks and sovereigns try to recapitalize. In other words, this isn't bullish sidelined cash waiting to jump back in the market, but cash that is gone most likely forever or at least for the foreseeable future.