Best of the Week
Most Popular
1.Oil Wars 2016 - US vs Russia vs Saudi Arabia vs Iran - Nadeem_Walayat
2.Crude Oil Price Crash Triggering Global Instability, Trend Forecast 2016 - Nadeem_Walayat
3.Stock Market Crash - Last Week was The 2nd and Final Warning... - Clive_Maund
4.Stock Market Crash Apocalypse or Bull Market Severe Correction? - Nadeem_Walayat
5.TShipping Said to Have Ceased… Is the Worldwide Economy Grinding to a Halt? - Jeff_Berwick
6.Crude Oil Price Crash Catastrophe, Independant Scotland Literally Begging to Rejoin the UK - Nadeem_Walayat
7.Summers: Global Economy Can't Withstand Four 2016 Fed Hikes - Bloomberg
8.Gold And Silver: New World Order: Public Be Damned, Preferably Dead - Michael_Noonan
9.Rigged U.S. Ttreasury Bond Market Double Barreled Hidden Q.E. To Infinity - Jim_Willie_CB
10.Major Stocks Bear Market Awakening - Zeal_LLC
Last 5 days
Is This the Debt Bubbles Last Rattle? - 12th Feb 16
Gold Stocks Upside Targets - 12th Feb 16
Stock Market Observations - 12th Feb 16
Will Capital Controls Return? - 12th Feb 16
Gold, Gold Stocks, and the End Game - 12th Feb 16
Canadian Dollar Now Even Less of a Haven from US Dollar Collapse Than Before - 12th Feb 16
The Stock Market Dow Elevator; 18, 17, 16.... - 12th Feb 16
Will Harry Dent Eat Crow on His $700 Gold Price Prediction? - 12th Feb 16
Where to Hide Your Money From Reckless Governments - 12th Feb 16
The War on Cash is About to Go into Hyperdrive - 11th Feb 16
More Bankruptcy For Your Retirement Portfolio - 11th Feb 16
2016 - Gold & Silver Rising: A Gold And Silver Bottom May Be In - 11th Feb 16
Gain Trading Confidence by Improving Your Elliott Wave Analysis Skills - Video - 11th Feb 16
With A Gloomy Start To 2016, A Bust Seems Just Around The Corner - 11th Feb 16
UK Interest Rates, Economy Forecasts 2016 and 2017 - Video - 10th Feb 16
World Markets Are in Sync - 10th Feb 16
If You Miss Buying Gold – You Will Regret, it Later - 10th Feb 16
The Fed Doesn't have a Clue! - 10th Feb 16
How Far Can Gold Price Go? - 10th Feb 16
It's Stock Market Panic Time! - 9th Feb 16
Gold Stocks Picks for Patient Pickers - 9th Feb 16
Oil Price Collapse U.S. Recession Odds 2016 - 9th Feb 16
Preparing for Crisis - It's About Risk Mitigation and Capital Preservation - 9th Feb 16
Top Silver Mining CEO: Don't Laugh, We Could See Silver $100+ - 8th Feb 16
Gold, Investment Leadership Changes Permanent? - 8th Feb 16
Stock Market Panic Decline Begins... - 8th Feb 16
How to Save Money By Growing Your Own Homegrown Tomatoes Indoors From Seeds - 8th Feb 16
US Economy Slides One Step Further Towards A Recession - 8th Feb 16
Gold Bear Market Bottom : Mr. Bear has left the PM Sector for Greener Pastures - 8th Feb 16
Stock Market At Important Support - 8th Feb 16
David Cameron Humiliated in Poland Over Refusal to Stop Taking UK Benefits, BrExit or Super State? - 8th Feb 16
Why Crude Oil Prices Could Continue FALLING From Here - 7th Feb 16
Stock Market S&P, NAS Best, Most Reliable Answers Come From The Market And You - 7th Feb 16
Stocks Bear Market Continues - 7th Feb 16
Silver COT Paving Way for Sustained Upside Breakout Sharp Rally - 7th Feb 16
US Dollar Double Top, Gold Prospects Brightening Rapidly - 7th Feb 16
Gold And Silver - Is A Bottom In? Nothing Confirmed - 7th Feb 16
Gold Stocks Something has Changed - 6th Feb 16
UK Interest Rates, Economy GDP Forecasts 2016 and 2017 - 6th Feb 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Global Financial Crisis 2016

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

Stock-Markets

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,

Claus

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 http://www.moneyandmarkets.com


© 2005-2016 http://www.MarketOracle.co.uk - 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