Saturday, March 13, 2010

Bear ready to attack?

Check out this chart showing when cash held by mutual funds is around 3.5% that is often when the market falls.

1) Major rallies occurred in 1974, 1982, and 1990 when the cash levels were greater than 11%.

2) The market sold off in 1973, 1976, and 2000 when cash levels were below 4.5%.

3) The old historical low was 3.9% in 05/1972. The market top was 12/1972 followed by a 46% decline. The next historical low was 4.0% on 03/2000 followed by a 43% decline. New historic lows of 3.5% were set in June and July 2007.

4) Cash levels reached 6.5% in November 2000 but the market declined to a bottom in October 2002.

5) Cash levels reached 5.9% in February 2009 then rolled over sharply.

6) The January 2010 level was 3.6% compared to 3.6% in December 2009 and 5.7% in January 2009. Cash levels are in a very low range. The chart suggests the market is near a top as cash levels are near to the historic low of 3.5%. The next decline should be similar to 2000-2002 and 2007-2009 (50-60%).

7) Cash levels will have to move much higher before the secular bear market ends.

8) Stock funds posted an inflow of $16.34 billion in January, compared with an outflow of $3.53 billion in December. Among stock funds, world equity funds (US funds that invest primarily overseas) posted an inflow of $10.10 billion in January, vs. an inflow of $5.41 billion in December. Funds that invest primarily in the US had an inflow of $6.24 billion in January, vs. an outflow of $8.94 billion in December.

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