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When mutual fund managers are very positive on the market, historically they have kept lower levels of cash on hand in their portfolios. Watching these levels has been a very good predictor of where the stock market might be heading. 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.

The following is from a newsletter I wrote to my clients back in 2007 right before the start of the greatest bear market since the Great Depression.

In 1971, these cash levels went as low as 4% and a -9% decline followed.
In 1972, these cash levels went as low as 3.9% and a -42% decline followed.

Then the cash levels went back up to the average of 8 to 10% again for a very long time until April 98. At that point they went back under 5% for the first time in 21 years. Following that dip down to 4.8% of cash, the market dropped -19%.

Then between 1998 and March 2000, the cash levels stayed in the mid to upper 4% ranges. March 2000, 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 September 2005, we set another record low in cash levels of 3.8%. That led to a mild decline of -5.2%.

In March 2007, we are now at a new record of 3.7%. Does that mean we have a bear market in our future? History would suggest that we have some type of stock market trouble in our near future. The irony is that we are at an all-time in the Dow just like we were in March of 2000.

Fast Forward to Today

So, wonder where we are today? We are currently at a record low level of cash in mutual funds at 3.6%.

NEW BULL MARKETS DON’T START UNTIL CASH LEVELS IN MUTUAL FUNDS ARE CLOSER TO 10%.

That is not an opinion. That is what history has shown. With that said, I would be careful with the risk that you are taking. Things can change very quickly.

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