Archive for September 21st, 2009

There all types of indicators that you can look at in the stock market that can give you an idea of what might lie ahead.  Many of the indicators that I follow would suggest that we are nearing the end of this stock market rally which began March of this year.  One of the areas of focus concerns optimism.  Typically, over the top optimism has been historically associated with tops in the stock markets.  In other words, it has been historically negative for stocks when everyone is so optimistic.   

One indicator of optimism worth following is the percentage of cash that mutual funds hold.  Generally speaking, mutual fund managers hold 5% on average of their assets in cash.  It is considered bullish for the market if cash holdings are between 5% and 8%.  If cash holdings are above 10%, that would indicate that mutual fund managers are generally negative. However, when you take these percentages to the extreme it can mean that things are about to change.  Extreme would be above or below that range.     

Consider these statistics that date back to 1961. Throughout the 60’s mutual funds held on average 5 to 6% of their portfolios in cash. In some instances, it was as high as 9% to 10%. Cash levels of 4% or lower was a precursor to a market decline. In other words, when mutual fund managers held around 4% of cash, it was a signal that the stock market was about to go into a bear market or at least go through some type of a decline. For example, in 1972 these cash levels went as low as 3.9% and a -42% decline followed.   In March 2000, we saw the first dip down to 4% cash level in almost 30 years. Of course, that occurred at the top of the great bull market run that led to a -47% decline in the stock market.  In July 2007 (right before the worst bear market since the Great Depression), we saw cash levels at a record low of 3.5%. 

Today the latest reading shows cash levels at 4.2% and heading lower.  Could that be telling us something?  Only time will tell.  It is just another indicator telling us that risk to being invested in stocks continues to increase. 

As far as levels on the S&P 500 to watch?  The price level of 1062 is still key.  Falling back below that level would be a key indicator that we are going back into a decline of some type.

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