Best of the Week
Most Popular
1.War on Cash, Bank of England Planning Hyper QE, Scrapping Cash for Digital Currency - Nadeem_Walayat
2.Stock Market End Run Smash Crash Looks Imminent... - Clive_Maund
3.Europe Refugee Crisis, UK to Repatriate 120,000 Hungarian Economic Migrants Back to Hungary - Nadeem_Walayat
4.The Great Deflation Will Destroy All Bubbles – These Too - Harry_Dent
5.Deflation Signals Abound for U.S. Dollar, Forex Markets and Commodities - Rambus_Chartology
6.U.S. Housing Market Two Outs in The Bottom of The Ninth - James_Quinn
7.Poland, Czech, Slovakia and Hungary Refugee Hypocrisy After Flooding UK with 4 Million Economic Migrants - Nadeem_Walayat
8.The Two Real Reasons Crude Oil Prices Are Currently Slipping - Dr. Kent Moors
9.R.I.P. Interest Rates - Andrew Snyder
10.Steps from a Deep October Stock Market Selloff - Bob_Loukas
Last 5 days
Putin’s Blitz Leaves Washington Rankled and Confused - 4th Oct 15
More Selling for Stock Market, Gold? - 4th Oct 15
Gold And Silver – A Reality Check - 3rd Oct 15
Stock Market Primary IV Still, or Primary V Underway? - 3rd Oct 15
The Oil Industry’s Day of Reckoning - 3rd Oct 15
U.S. Interest Rate Hikes Keep On Slippin' Into the Future; Treasury Yields Sink Again - 3rd Oct 15
China's Stock Market Crashing; Time for Panic or Restraint - 3rd Oct 15
SPX Stocks Bulls Struggle to Regain the Upper hand... - 2nd Oct 15
The Two Faces of Stock Market Volatility - 2nd Oct 15
Money Supply and the Fed’s Serious Inflation Risks - 2nd Oct 15
Stock Market How Bad Can This Get, And How Fast? - 2nd Oct 15
A Worrying Set Of Recession Signals - 2nd Oct 15
Negative Jobs Report Sents SPX, TNX Lower - 2nd Oct 15
Don't be Fooled by the Recent Equity market Rallies. Its a Bear Market, Stupid! - 2nd Oct 15
US Bond Market - How to Fix This - 2nd Oct 15
Survival Secrets from Colorado Resource Investing Front Lines - 2nd Oct 15
What Two Risks From Rising Interest-Rates Could Each Trigger A New Global Crisis? - 1st Oct 15
Stock Market S&P 500 Volatility-Based Price Probability Range - 1st Oct 15
Dow Stock Market About To Crash Like October 1929? Get Your Physical Silver - 1st Oct 15
Stock Market Negative Expectations Once Again - Will It Break Down? - 1st Oct 15
Advice for Biotech Investors: 'Hold Your Powder' 'til Winter - 1st Oct 15
Best Short-Term Commodity Market Opportunities - Video - 1st Oct 15
The Coming Corporate "Crime Wave" - 30th Sept 15
Stock Market Retracement May Have Run Its Course - 30th Sept 15
A Stocks Bear Market Is Now More Likely Than Not - 30th Sept 15
The Killer Ape, Human Evolution, Artificial Intelligence and Extinction End Game - 30th Sept 15
Junk Bond Market Imminent Collapse Threatens (Unwelcome) BIG Rate Rises - 30th Sept 15
Stocks: Why Following the Crowd is Usually a Big Mistake - 29th Sept 15
This Stocks Bear is Just Waking from Hibernation - 29th Sept 15
Interest Rates All Bad at 0%? - 29th Sept 15
If Stocks Can't Hold These Levels, We'll Have a Bear Market - 29th Sept 15
7 Bullish Gold Price Indicators - 29th Sept 15
Crude Oil Price Is Going to Fall by 50%… Again - 29th Sept 15
SPX Triggers a Amall Head & Shoulders Formation - 28th Sept 15
Stock Market Bubble Balloons in Search of Needles - 28th Sept 15
Gold and Silver, Precious Metals Complex Getting Interesting - 28th Sept 15
Economic Channels of Distress - Fourth Turning Crisis of Trust - 28th Sept 15
Stock Market Testing Important Levels - 28th Sept 15
Stock Market Going Down, Gold Chop Continues - 27th Sept 15
Stock Market Primary Wave IV Inflection Point - 27th Sept 15

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

Mutual Fund Cash Levels Do Not Support the Stock Market Rally

Stock-Markets / Stock Markets 2010 Jan 06, 2010 - 11:12 AM GMT

By: Claus_Vogt


Best Financial Markets Analysis ArticleAs a group, mutual fund managers are as good a contrarian indicator for the stock market as they come. History shows that they hold relatively high cash levels at the beginning of a bull market. Then at the end of a bull market they don’t have much cash since they’re more or less fully invested.

And if you look at mutual fund cash levels in relation to the S&P 500 over the years, as shown in the chart below, you can easily spot this pattern.

S&P 500 vs. Mutual Fund Cash

High Cash Levels in the 1980s, Low Cash Levels in 2000

Based on my research, high cash levels of more than 8 percent dominated the early 1980s until the early 1990s. During most of that time stocks were attractively valued, and they staged a huge rally from 1982 to 1987, and again thereafter.

In 1995, when the stock market bubble began, mutual funds’ cash levels started to decline in earnest, falling below 7 percent. By 2000, at the height of the bubble, they had come down to 4 percent. This was close to the low point of 3.9 percent reached in 1972 … at the top of a bull market after which stocks lost nearly 50 percent.

Today we know that March 2000 was the climax of the 1995 bubble. And after going sideways for the rest of 2000, a huge bear market began, and the S&P 500 lost more than 40 percent.

Low Cash Levels in 2007, And Low Cash Levels Now

Despite those huge losses, cash levels did not rise by much. And after hitting 6.5 percent at the end of 2000, fund managers quickly started to put most of the entrusted money back into the market.

By 2005 cash levels had fallen below the 4 percent boundary. And in the summer of 2007 they hit a record low of 3.5 percent. The market topped shortly thereafter and then lost more than 50 percent!

It takes cash to fund a rally. And right now, mutual funds don’t have much.
It takes cash to fund a rally. And right now, mutual funds don’t have much.

Now we’re seeing a similar pattern evolve: Near the stock market’s low in 2009, cash levels reached nearly 6 percent. Then they rolled over sharply and quickly fell back below the 4 percent threshold. They are currently at 3.8 percent.

Low Cash Levels Signal High Market Risk

Mutual fund cash levels are not a short-term, stock market timing tool. However, they do give us another gauge to compare current market conditions to what has happened in the past.

So are cash levels on their way down to 3.5 percent? Will they reach new historical lows in the coming months? Or is 3.8 percent low enough to signal the end of the current bull move?

No one really knows for sure. But what I do know is that it takes cash to fund a rally. And right now, historically speaking, mutual funds don’t have much of it. To me, that’s a sign of a very risky stock market environment.

In the bigger picture I see the stock market in a secular bear market that began in 2000. And much higher mutual fund cash levels are needed before the next secular bull market can begin.

Best wishes,


This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit

© 2005-2015 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History