A new report by the Investment Company Institute shows that over the past four months, a staggering $75 billion has been withdrawn from equity mutual funds.

That is more than the $73 billion that was withdrawn from equity funds between October 2008 and February 2009 in the wake of the Lehman Brothers bankruptcy and the onset of the financial crisis. 

In all, the study reports that $178 billion has been pulled from both mutual funds and equity ETFs over the past two and a half years.

These huge outflows raise some legitimate questions for financial advisors and their clients:  Is this panic flight from equities by small investors a classic indicator that the market has bottomed out and that it’s time to buy? Is something more fundamental happening, with investors fleeing markets long term because of fears or a new recession? Or, perhaps, after flash crashes, double-dealing by investment banks and the huge influence of high-frequency trading, there’s now a broad perception that the market is rigged and small players can’t win?

Certainly the Securities and Exchange Commission has validated some of the fears about a rigged market, by announcing that it is investigating firms that engage in computerized high-frequency trading and is also considering a rule that would bar banks from betting against structured debt issues that they is marketing to investors.

And even if the market isn’t “rigged” against small investors, there are clear reasons to worry with the U.S. economy teetering on the brink of negative growth and with a default by Greece -- and the probable ensuing damage on European companies and economies -- looking more and more likely by the day.

UBS Investment Management has just cited those concerns in recommending a reduction in equity weighting in portfolios from “neutral” to “underweight.”

But at the same time, there is a lot that looks familiar about the current flight from equities which might argue for a different approach.

At least one investment strategist, Jeff Saut, managing director at Raymond James & Associates, thinks that the investor panic is a clear sign that the market has bottomed. In fact, he thinks it bottomed on Aug. 9 when the S&P Index hit an inter-day low of 1,101.54.  

“We told people back in March and April to raise cash,” Saut told On Wall Street Tuesday. “Admittedly we were a little early, but basically we were right to tell people to park their money.”

Now, he says, assuming there is no recession, “which I don’t think is very likely,” it’s a good time to be investing in equities.  

“With the 10-year Treasury yield below 2% this morning, you’ve got earnings yielding over 9%,” he said, “and that gives you a P/E ratio of 11X earnings. So I agree with the idea of selling bonds, but not stocks.”

For those who fear a recession, Saut suggest adopting a portfolio risk management strategy.

“You could buy the Goldman Sachs Dynamic Allocation Fund if you’re a mutual fund investor,” he suggests. “That fund typically captures 80-85% of the upside but only 30-35% of the downside.”  He also suggests that advisors look into REITs or oil and gas limited partnership investments for their clients.

For those investors who are nearing retirement, he favors dividend-paying stocks.

Ryan Detrick, a senior technical strategist at Schaeffer’s Investment Research agrees with Saut that the flight of investors from equities -- especially the $36 billion that was withdrawn just in August, the biggest outflow since October ’08 when $47 billion was pulled out of equities -- is “a good sign.”

But Detrick isn’t ready to declare a bottom to the equities market yet.

“Besides investor despair, you want to also see positive price action and unfortunately we haven’t seen that yet,” he said. “So the market might continue to be volatile and to move sideways for some time until we start to get some significant good news.”

He adds, “Remember, there are some good reasons why people are selling equities. The Greek debt crisis could blow up with unknown consequences, like dragging down Italy or France, for example.”

At the same time, he suggests that many of the downside risks to equities markets have already been priced in, so careful selective buying now could make sense.

“We like the consumer discretionary sector,” he said. “It’s been holding up well. Look at the SPDR S&P Retail ETF (XRT). It’s up 4% year to date, which is not bad. We think this sector is very promising.”