(Updated 10/31/09)
The stock market needs cash to fuel a rally. The following chart shows the Mutual Fund Cash Levels vs. the S&P 500 from 1968.
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 September 2009 level was 3.8% compared to 4.0% in August 2009. Cash levels are in a very low range. The chart suggests the market could move higher as cash levels decline to 3.5% but this will be followed by another massive sell off 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 outflow of $10.53 billion in September, compared with an inflow of $4.00 billion in August. Among stock funds, world equity funds (US funds that invest primarily overseas) posted an inflow of $722 million in September, vs. an inflow of $5.93 billion in August. Funds that invest primarily in the US had an outflow of $11.25 billion in September, vs. an outflow of $1.93 billion in August.
